sv1za
As filed with the Securities and Exchange Commission on
November 19, 2008
Registration No. 333-150876
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
Amendment No. 7
to
Form S-1
REGISTRATION
STATEMENT
THE SECURITIES ACT OF
1933
Grand Canyon Education,
Inc.
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
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8221
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20-3356009
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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3300 W. Camelback
Road
Phoenix, Arizona 85017
(602) 639-7500
(Address, Including Zip Code,
and Telephone Number, Including Area Code, of Registrants
Principal Executive Offices)
Christopher C.
Richardson
General Counsel
Grand Canyon Education,
Inc.
3300 W. Camelback
Road
Phoenix, Arizona 85017
(602) 639-7500
(Name, Address, Including Zip
Code, and Telephone Number, Including Area Code, of Agent For
Service)
Copies to:
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Steven D. Pidgeon, Esq.
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Mark A. Stegemoeller, Esq.
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David P. Lewis, Esq.
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Steven B. Stokdyk, Esq.
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DLA Piper LLP (US)
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Latham & Watkins LLP
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2415 East Camelback Road, Suite 700
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355 South Grand Avenue
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Phoenix, Arizona 85016
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Los Angeles, California 90071
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(480) 606-5100
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(213) 485-1234
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after this
registration statement becomes effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated filer o
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Non-accelerated
filer þ
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Smaller reporting company o
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(Do not check if a smaller reporting company)
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of
the Securities Act or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant
to said Section 8(a), shall determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not
permitted.
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Subject
to Completion
Dated November 19, 2008
10,500,000 Shares
Grand Canyon Education, Inc.
Common Stock
This is the initial public offering of common stock of Grand
Canyon Education, Inc. We are offering 10,500,000 shares of
our common stock.
Prior to this offering, there has been no public market for our
common stock. The initial public offering price of our common
stock is expected to be between $12.00 and $14.00 per share. We
have received approval to list our common stock on the Nasdaq
Global Market under the symbol LOPE.
Seventy-five percent (75%) of the gross proceeds from the sale
of stock in this offering, before underwriting discounts and
commissions and estimated offering expenses, will be paid to our
existing stockholders as a special distribution.
Investing in our common stock involves risks. See Risk
Factors beginning on page 11.
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Per Share
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Total
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Public offering price
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$
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$
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Underwriting discounts
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$
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$
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Proceeds, before expenses, to us
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$
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$
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We have granted the underwriters a
30-day
option to purchase up to 1,575,000 additional shares of common
stock from us at the public offering price, less the
underwriting discounts and commissions, to cover over-allotments
of shares, if any.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
Delivery of the shares of common stock will be made on or
about ,
2008.
Joint Book-Running Managers
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Credit
Suisse |
Merrill Lynch & Co.
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BMO Capital Markets William
Blair & Company Piper Jaffray
The date of this prospectus
is ,
2008.
TABLE OF
CONTENTS
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Page
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1
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11
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F-1
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EX-23.2 |
ABOUT
THIS PROSPECTUS
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus. We
are offering to sell, and seeking offers to buy, shares of
common stock only in jurisdictions where offers and sales are
permitted. You should assume that the information contained in
this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock. Our business,
financial condition, results of operations, and prospects may
have changed since that date.
Until ,
2008 (25 days after the date of this prospectus), all
dealers, whether or not participating in this offering, that
effect transactions in these securities may be required to
deliver a prospectus. This is in addition to the dealers
obligation to deliver a prospectus when acting as an underwriter
in this offering and when selling previously unsold allotments
or subscriptions.
PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in
this prospectus. This summary sets forth the material terms of
the offering, but does not contain all of the information that
you should consider before investing in our common stock. You
should read the entire prospectus carefully before making an
investment decision, especially the risks of investing in our
common stock described under Risk Factors. Unless
the context otherwise requires, the terms we,
us, our, and Grand Canyon
refer to Grand Canyon Education, Inc. and our predecessor as
context requires.
Overview
We are a regionally accredited provider of online postsecondary
education services focused on offering graduate and
undergraduate degree programs in our core disciplines of
education, business, and healthcare. In addition to our online
programs, we offer ground programs at our traditional campus in
Phoenix, Arizona and onsite at the facilities of employers. We
are committed to providing an academically rigorous educational
experience with a focus on career-oriented programs that meet
the objectives of working adults. We utilize an integrated,
innovative approach to marketing, recruiting, and retaining
students, which has enabled us to increase enrollment from
approximately 3,000 students at the end of 2003 to approximately
22,000 students at September 30, 2008, representing a
compound annual growth rate of approximately 52%. At
December 31, 2007, our enrollment was approximately 14,800,
85% of our students were enrolled in our online programs, and
62% of our students were pursuing masters degrees.
Our three core disciplines of education, business, and
healthcare represent large markets with attractive employment
opportunities. According to a March 2008 report from the
U.S. Department of Education, National Center for Education
Statistics, or NCES, these disciplines ranked as three of the
four most popular fields of postsecondary education, based on
degrees conferred in the
2005-06
school year. The U.S. Department of Labor, Bureau of Labor
Statistics, or BLS, estimated in its 2008-09 Career Guide that
these fields comprised over 40 million jobs in 2006, many
of which require postsecondary education credentials.
Furthermore, the BLS has projected that the education, business,
and healthcare fields will generate approximately six million
new jobs between 2006 and 2016.
We primarily focus on recruiting and educating working adults,
whom we define as students age 25 or older who are pursuing
a degree while employed. As of September 30, 2008,
approximately 92% of our online students were age 25 or
older. We believe that working adults are attracted to the
convenience and flexibility of our online programs because they
can study and interact with faculty and classmates during times
that suit their schedules. We also believe that working adults
represent an attractive student population because they are
better able to finance their education, more readily recognize
the benefits of a postsecondary degree, and have higher
persistence and completion rates than students generally.
We have experienced significant growth in enrollment, net
revenue, and operating income over the last several years. Our
enrollment at December 31, 2007 was approximately 14,800,
representing an increase of approximately 38% over our
enrollment at December 31, 2006. Our net revenue and
operating income for the year ended December 31, 2007 were
$99.3 million and $4.3 million, respectively,
representing increases of 37.7% and 42.8%, respectively, over
the year ended December 31, 2006. Our enrollment at
September 30, 2008 was approximately 22,000, representing
an increase of approximately 63% over our enrollment at
September 30, 2007. Our net revenue and operating income
for the nine months ended September 30, 2008 were
$109.6 million, and $9.0 million, respectively,
representing increases of 60.1% and 305.5%, respectively, over
the nine months ended September 30, 2007. We seek to
achieve continued growth in a manner that reinforces our
reputation for providing academically rigorous,
career-oriented
educational programs that advance the careers of our students.
We have been regionally accredited by the Higher Learning
Commission of the North Central Association of Colleges and
Schools, or the Higher Learning Commission, and its predecessor
since 1968, and we were reaccredited by the Higher Learning
Commission in 2007 for the maximum term of ten years. In
addition, we have specialized accreditations for certain
programs from the Association of Collegiate Business Schools and
Programs, the Commission on Collegiate Nursing Education, and
the Commission on Accreditation of Athletic
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Training Education. We believe that our regional accreditation,
together with these specialized accreditations, reflect the
quality of our programs, enhance their marketability, and
improve the employability of our graduates.
We were founded as Grand Canyon College, a traditional, private,
non-profit college, in 1949 and moved to our existing campus in
Phoenix, Arizona in 1951. In February 2004, several of our
current stockholders acquired Grand Canyon University and
converted it to a for-profit institution. Since then, we have
enhanced our senior management team, expanded our online
platform and programs, and initiated a marketing and branding
effort to further differentiate us in the markets in which we
operate and support our continued growth.
Industry
The United States market for postsecondary education represents
a large and growing opportunity. According to the
March 2008 NCES report, total revenue for all
degree-granting postsecondary institutions was over
$385 billion for the
2004-05
school year. In addition, according to a September 2008 NCES
report, approximately 18.0 million students were projected
to be enrolled in postsecondary institutions in 2007 and the
number was projected to grow to 18.6 million by 2010. We
believe that future growth in this market will be driven, in
part, by the increasing number of job openings in occupations
that require bachelors or masters degrees, which a
November 2007 report based on BLS data has projected will grow
approximately 17% and 19%, respectively, between 2006 and 2016,
or nearly double the growth rate the BLS projected for
occupations that do not require postsecondary degrees. Moreover,
according to U.S. Census Bureau data, individuals with a
postsecondary degree are able to obtain a significant
compensation premium relative to individuals without a degree.
The market for online postsecondary education is growing more
rapidly than the overall postsecondary market. A 2007 study by
Eduventures, LLC, an education consulting and research firm,
projected that from 2002 to 2007 enrollment in online
postsecondary programs increased from approximately
0.5 million to approximately 1.8 million, representing
a compound annual growth rate of approximately 30.4%. In
comparison, in September 2008 the NCES projected a compound
annual growth rate of 1.6% in enrollment in postsecondary
programs overall during the same period. We believe this growth
has been driven by a number of factors, including the greater
convenience and flexibility of online programs as compared to
ground-based programs and the increased acceptance of online
programs among academics and employers. According to a 2006
survey by the Sloan Consortium, a trade group focused on online
education, 79.1% of chief academic officers surveyed at
institutions with 15,000 or more students, most of which offer
online programs, and 61.9% of all chief academic officers
surveyed, believe that online learning outcomes are equal or
superior to traditional face-to-face instruction.
Competitive
Strengths
We believe we have the following competitive strengths:
Established presence in targeted, high demand
disciplines. We have an established presence
within our three core disciplines of education, business, and
healthcare. We believe our focused approach enables us to
develop our academic reputation and brand identity within our
core disciplines, recruit and retain quality faculty and staff
members, and meet the educational and career objectives of our
students.
Focus on graduate degrees for working
adults. We have designed our program offerings
and our online delivery platform to meet the needs of working
adults, particularly those seeking graduate degrees to obtain
pay increases or job promotions that are directly tied to higher
educational attainment.
Innovative marketing, recruiting, and retention
strategy. We have developed an integrated,
innovative approach to student marketing, recruitment, and
retention to reach our targeted students. We also proactively
provide support to students at key points during their
consideration of, and enrollment at, Grand Canyon University to
enhance the probability of student enrollment and retention.
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Commitment to offering academically rigorous, career-oriented
programs. We are committed to offering
academically rigorous educational programs that are designed to
help our students achieve their career objectives. Our programs
are taught by qualified faculty, substantially all of whom hold
at least a masters degree and often have practical
experience in their respective fields.
Complementary online capabilities and
campus-based
tradition. We believe that our online
capabilities, combined with our nearly
60-year
heritage as a traditional campus-based university, differentiate
us in the for-profit postsecondary market and enhance the
reputation of our degree programs among prospective students and
employers.
Experienced executive management team with strong operating
track-record. Our executive management team
possesses extensive experience in the management and operation
of publicly-traded for-profit, postsecondary education
companies, as well as other educational services businesses,
including in the areas of marketing to, recruiting, and
retaining students pursuing online and other distance education
degree offerings, and in online content development.
Growth
Strategies
We intend to pursue the following growth strategies:
Increase enrollment in existing programs. We
intend to increase enrollment in existing programs within our
three core disciplines, which we believe offer ample opportunity
for growth. We also intend to continue to increase the number of
our enrollment counselors and marketing and student services
personnel to drive enrollment growth and enhance student
retention.
Expand online program and degree offerings. We
develop and offer new programs that we believe have attractive
demand characteristics. We launched 17 new online program
offerings in 2007 and have launched twelve in the first nine
months of 2008, including our first doctoral degree program. Our
new program offerings typically build on existing programs and
offer our students the opportunity to pursue their specific
educational objectives while allowing us to expand our program
offerings with only modest incremental investment.
Further enhance our brand recognition. We
continue to enhance our brand recognition by pursuing online and
offline marketing campaigns, establishing strategic branding
relationships with recognized industry leaders, and developing
complementary resources in our core disciplines that increase
the overall awareness of our offerings.
Expand relationships with private sector and government
employers. We seek additional relationships with
health care systems, school districts, emergency services
providers, and other employers through which we market our
offerings to their employees. These relationships provide leads
for our programs, build our recognition among employers in our
core disciplines, and enable us to identify new programs and
degrees that are in demand by students and employers.
Leverage infrastructure and drive earnings
growth. We have made significant investments in
our people, processes, and technology infrastructure since 2004.
We believe these investments have prepared us to deliver our
academic programs to a much larger student population with only
modest incremental investment. We intend to leverage our
historical investments as we increase our enrollment, which we
believe will allow us to increase our operating margins over
time.
Risks
Affecting Us
Our business is subject to numerous risks, as discussed more
fully in the section entitled Risk Factors
immediately following this Prospectus Summary. In particular,
our business would be adversely affected if:
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we are unable to attract and retain students as a result of the
highly competitive markets in which we operate;
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we are unable to comply with the extensive regulatory
requirements to which our business is subject, including
requirements governing the Title IV federal student
financial aid programs, state laws and regulations, and
accrediting commission requirements;
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we experience any student, regulatory, reputational, or other
events that adversely affect our graduate degree offerings, from
which we currently derive a significant portion of our revenues;
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we experience damage to our reputation or other adverse effects
in connection with any compliance audit; regulatory action;
investigation, including the investigation of Grand Canyon
University currently being conducted by the Office of Inspector
General of the U.S. Department of Education; or litigation,
including the pending qui tam action regarding the manner
in which we have compensated our enrollment personnel; or as a
result of negative publicity affecting us or other companies in
the for-profit postsecondary education sector;
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we are unable to attract and retain key personnel needed to
sustain and grow our business;
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our students are unable to obtain student loans on affordable
terms, or at all;
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adverse economic or other developments affect demand in our core
disciplines; or
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we are unable to develop new programs or expand our existing
programs in a timely and cost-effective manner.
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Corporate
Information
We were formed in Delaware in November 2003 for the purpose of
acquiring the assets of Grand Canyon University. Our principal
executive offices are located at 3300 West Camelback Road,
Phoenix, Arizona 85017, and our telephone number is
(602) 639-7500.
Our website is located at www.gcu.edu. The information
on, or accessible through, our website does not constitute part
of, and is not incorporated into, this prospectus.
Accreditation
We are accredited by the Higher Learning Commission of the North
Central Association of Colleges and Schools,
30 N. LaSalle Street, Suite 2400, Chicago,
Illinois
60602-2504;
telephone
(312) 263-0456;
website www.ncahlc.org. The information on, or accessible
through, the website of the Higher Learning Commission does not
constitute part of, and is not incorporated into, this
prospectus.
Industry
Data
We use market data and industry forecasts and projections
throughout this prospectus, which we have obtained from market
research, publicly available information, and industry
publications. These sources generally state that the information
they provide has been obtained from sources believed to be
reliable, but that the accuracy and completeness of the
information are not guaranteed. The forecasts and projections
are based on industry surveys and the preparers experience
in the industry as of the time they were prepared, and there is
no assurance that any of the projected numbers will be reached.
Similarly, we believe that the surveys and market research
others have completed are reliable, but we have not
independently verified their findings.
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OFFERING
SUMMARY
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Common stock offered by us |
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10,500,000 shares |
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Common stock outstanding after this offering |
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43,559,714 shares |
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Use of proceeds |
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We estimate that the net proceeds to us from this offering will
be approximately $120.8 million, or approximately
$139.9 million if the underwriters exercise their
over-allotment option in full, based on the midpoint of the
price range set forth on the cover page of this prospectus and
after deducting the underwriting discounts and commissions and
estimated offering expenses payable by us. |
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As described in Use of Proceeds and Special
Distribution, we will use the proceeds of this offering to
pay a special distribution to our stockholders of record as of
November 18, 2008, in the amount of 75% of the gross
proceeds received by us from the sale of stock in this offering,
including any proceeds we receive from the underwriters
exercise of their over-allotment option, before underwriting
discounts and commissions and estimated offering expenses. We
intend to use the remaining proceeds to pay the expenses of this
offering and for general corporate purposes. |
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The payment of the special distribution in the amount described
above permits a return of capital to all of our stockholders as
of the record date, and does so without significantly decreasing
our capital resources or requiring these stockholders to sell
their shares. Of the estimated aggregate amount of the special
distribution of $102.4 million (exclusive of any amounts
that may be received from the underwriters exercise of the
over-allotment option), assuming an initial public offering
price of $13.00 per share, which is the midpoint of the
price range set forth on the cover page of this prospectus,
$54.3 million will be paid in respect of shares of our
capital stock over which our directors and executive officers
are deemed to exercise sole or shared voting or investment
power. These proceeds will be allocated as set forth in the
following table. |
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Special Distribution
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(In thousands)
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Directors
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Chad N.
Heath(1)
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$
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30,772
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D. Mark
Dorman(1)
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$
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30,772
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Executive Officers
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Brent D. Richardson
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$
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11,218
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John E. Crowley
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1,102
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Christopher C. Richardson
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$
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11,225
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All directors and executive officers as a group
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$
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54,316
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(1)
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Represents shares owned by Endeavour Capital Fund IV, L.P.
and certain affiliated funds. D. Mark Dorman and Chad N. Heath,
two of our directors, are managing directors of Endeavour
Capital IV, LLC, the general partner of such funds.
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See Special Distribution and Certain
Relationships and Related Transactions Special
Distribution for additional information regarding the
amount and the beneficiaries of the special distribution. |
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Dividend policy |
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Except with respect to the special distribution, we do not
anticipate declaring or paying any cash dividends on our common
stock in the foreseeable future. |
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Risk factors |
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You should carefully read and consider the information set forth
under the heading titled Risk Factors and all other
information set forth in this prospectus before deciding to
invest in shares of our common stock. |
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Proposed Nasdaq Global Market symbol |
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LOPE |
The number of shares of our common stock to be outstanding
following this offering is based on the number of shares of our
common stock outstanding as of September 30, 2008, and
excludes 5,249,921 shares of common stock reserved for
future issuance under our stock-based compensation plans. The
5,249,921 shares reserved for future issuance includes
108,899 fully vested restricted shares to be granted to
Brian E. Mueller, our Chief Executive Officer, and
731,102 fully vested and 2,585,784 unvested stock
options to be granted to employees and a director immediately
following the effectiveness of the offering at the initial
public offering price.
Unless otherwise indicated, this prospectus reflects and assumes
the following:
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no exercise by the underwriters of their option to purchase up
to 1,575,000 additional shares from us;
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a 1,826-for-one split of our outstanding common stock effected
on September 29, 2008;
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the automatic conversion of all outstanding shares of
Series A convertible preferred stock into
10,870,178 shares of common stock upon the closing of the
offering;
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the filing of an amendment to our certificate of incorporation
to provide for the automatic conversion of all outstanding
shares of Series C preferred stock into
2,061,538 shares of common stock upon the closing of the
offering based on a conversion price equal to the initial public
offering price per share, assuming an initial public offering
price of $13.00 per share, which is the midpoint of the range
set forth on the cover page of this prospectus;
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the exercise of a warrant to purchase 909,348 shares of our
common stock for $0.58 per share, which warrant was exercised in
November 2008;
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the filing of our amended and restated certificate of
incorporation and the adoption of our amended and restated
bylaws immediately prior to the effectiveness of this offering;
and
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the rounding of all fractional share amounts to the nearest
whole number.
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6
SUMMARY
FINANCIAL AND OTHER DATA
The following table sets forth our summary financial and other
data as of the dates and for the periods indicated. The
statement of operations and other data, excluding period end
enrollment, for each of the years in the three-year period ended
December 31, 2007, have been derived from our audited
financial statements, which are included elsewhere in this
prospectus. The statement of operations and other data,
excluding period end enrollment, for each of the nine month
periods ended September 30, 2007 and 2008, and the balance
sheet data as of September 30, 2008, have been derived from
our unaudited financial statements, which are presented
elsewhere in this prospectus and include, in the opinion of
management, all adjustments, consisting of normal, recurring
adjustments, necessary for a fair presentation of such data. Our
historical results are not necessarily indicative of our results
for any future period.
You should read the following summary financial and other data
in conjunction with Selected Financial and Other
Data, Managements Discussion and Analysis of
Financial Condition and Results of Operations, and our
financial statements and related notes included elsewhere in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
(Restated)(1)
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except enrollment
|
|
|
|
and per share data)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
51,793
|
|
|
$
|
72,111
|
|
|
$
|
99,326
|
|
|
$
|
68,472
|
|
|
$
|
109,626
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
28,063
|
|
|
|
31,287
|
|
|
|
39,050
|
|
|
|
27,531
|
|
|
|
36,995
|
|
Selling and promotional
|
|
|
14,047
|
|
|
|
20,093
|
|
|
|
35,148
|
|
|
|
24,291
|
|
|
|
46,035
|
|
General and administrative
|
|
|
12,968
|
|
|
|
15,011
|
|
|
|
17,001
|
|
|
|
11,848
|
|
|
|
15,992
|
|
Royalty to former owner
|
|
|
1,619
|
|
|
|
2,678
|
|
|
|
3,782
|
|
|
|
2,585
|
|
|
|
1,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
56,697
|
|
|
|
69,069
|
|
|
|
94,981
|
|
|
|
66,255
|
|
|
|
100,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(4,904
|
)
|
|
|
3,042
|
|
|
|
4,345
|
|
|
|
2,217
|
|
|
|
8,992
|
|
Interest expense
|
|
|
(3,098
|
)
|
|
|
(2,827
|
)
|
|
|
(2,975
|
)
|
|
|
(2,236
|
)
|
|
|
(2,156
|
)
|
Interest income
|
|
|
276
|
|
|
|
912
|
|
|
|
1,172
|
|
|
|
887
|
|
|
|
508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(7,726
|
)
|
|
|
1,127
|
|
|
|
2,542
|
|
|
|
868
|
|
|
|
7,344
|
|
Income tax expense
(benefit)(2)
|
|
|
(3,440
|
)
|
|
|
529
|
|
|
|
1,016
|
|
|
|
347
|
|
|
|
2,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(4,286
|
)
|
|
|
598
|
|
|
|
1,526
|
|
|
|
521
|
|
|
|
4,476
|
|
Preferred dividends
|
|
|
|
|
|
|
(527
|
)
|
|
|
(349
|
)
|
|
|
(251
|
)
|
|
|
(791
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available (loss attributable) to common stockholders
|
|
$
|
(4,286
|
)
|
|
$
|
71
|
|
|
$
|
1,177
|
|
|
$
|
270
|
|
|
$
|
3,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.23
|
)
|
|
$
|
0.00
|
|
|
$
|
0.06
|
|
|
$
|
0.01
|
|
|
$
|
0.19
|
|
Diluted
|
|
$
|
(0.23
|
)
|
|
$
|
0.00
|
|
|
$
|
0.03
|
|
|
$
|
0.01
|
|
|
$
|
0.11
|
|
Shares used in computing earnings (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
18,470
|
|
|
|
18,853
|
|
|
|
18,923
|
|
|
|
18,885
|
|
|
|
19,133
|
|
Diluted
|
|
|
18,470
|
|
|
|
36,858
|
|
|
|
35,143
|
|
|
|
35,189
|
|
|
|
32,097
|
|
Pro forma earnings per common share
(Unaudited)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
$
|
0.03
|
|
|
|
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
$
|
0.03
|
|
|
|
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing pro forma earnings per common share
(Unaudited)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
40,321
|
|
|
|
|
|
|
|
40,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
45,015
|
|
|
|
|
|
|
|
41,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
(Restated)(1)
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except enrollment
|
|
|
|
and per share data)
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
817
|
|
|
$
|
2,387
|
|
|
$
|
7,406
|
|
|
$
|
5,136
|
|
|
$
|
6,015
|
|
Depreciation and amortization
|
|
$
|
1,879
|
|
|
$
|
2,396
|
|
|
$
|
3,300
|
|
|
$
|
2,319
|
|
|
$
|
3,676
|
|
Adjusted
EBITDA(4)
|
|
$
|
(895
|
)
|
|
$
|
9,074
|
|
|
$
|
11,723
|
|
|
$
|
7,309
|
|
|
$
|
14,568
|
|
Period end enrollment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
|
|
|
6,212
|
|
|
|
8,406
|
|
|
|
12,497
|
|
|
|
11,306
|
|
|
|
19,287
|
|
Ground
|
|
|
2,210
|
|
|
|
2,256
|
|
|
|
2,257
|
|
|
|
2,193
|
|
|
|
2,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008
|
|
|
|
|
|
|
|
|
|
Pro Forma,
|
|
|
|
|
|
|
|
|
|
as
|
|
|
|
Actual
|
|
|
Pro
Forma(3)
|
|
|
Adjusted(5)
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
22,227
|
|
|
$
|
22,753
|
|
|
$
|
43,904
|
|
Total assets
|
|
|
105,618
|
|
|
|
106,144
|
|
|
|
122,927
|
|
Capital lease obligations (including short-term)
|
|
|
30,775
|
|
|
|
30,775
|
|
|
|
30,775
|
|
Other indebtedness (including short-term indebtedness)
|
|
|
1,814
|
|
|
|
1,814
|
|
|
|
1,814
|
|
Preferred stock
|
|
|
32,739
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
(deficit)(2)(3)
|
|
|
(7,457
|
)
|
|
|
(76,567
|
)
|
|
|
44,278
|
|
|
|
|
(1) |
|
Our financial statements at December 31, 2006 and 2007 and
for each of the three years in the period ended
December 31, 2007 have been restated. See Note 3,
Restatement of Financial Statements, in our
financial statements that are included elsewhere in this
prospectus. |
|
(2) |
|
On August 24, 2005, we converted from a limited liability
company to a taxable corporation. For all periods subsequent to
such date, we have been subject to corporate-level U.S.
federal and state income taxes. |
|
|
|
(3) |
|
As described in Use of Proceeds and Special
Distribution, we will use the proceeds of this offering to
pay a special distribution to our stockholders of record as of
November 18, 2008, in the amount of 75% of the gross
proceeds received by us from the sale of stock in this offering,
including any proceeds we receive from the underwriters
exercise of their over-allotment option, before underwriting
discounts and commissions and estimated offering expenses. Since
the special distribution represents distributions to existing
stockholders to be made from the proceeds of an initial public
offering, the pro forma balance sheet as of September 30,
2008 reflecting the distribution, but not giving effect to the
offering proceeds, is presented. In addition, since the amount
of the special distribution exceeds net income for the
twelve-month period ended September 30, 2008, pro forma
earnings per common share, basic and diluted, are presented for
the year ended December 31, 2007 and for the nine-month
period ended September 30, 2008, which amounts give effect
to the number of shares that would be required to be issued at
an assumed initial public offering price of $13.00 per share to
pay the amount of dividends that exceeds net income for the
twelve-month period ended September 30, 2008. The pro
forma balance sheet and earnings per common share data also
reflect the exercise of the warrant to purchase
909,348 shares of our common stock for $0.58 per share
and assume the conversion of all outstanding shares of
Series A convertible preferred stock into
10,870,178 shares of common stock upon the closing of the
offering and the conversion of all outstanding shares of
Series C preferred stock into 2,061,538 shares of
common stock upon the closing of the offering based on a
conversion price equal to $13.00 per share, which is the
midpoint of the range set forth on the cover page of this
prospectus. |
|
|
|
(4) |
|
Adjusted EBITDA is defined as net income (loss) plus interest
expense net of interest income, plus income tax expense
(benefit), and plus depreciation and amortization (EBITDA), as
adjusted for (i) royalty payments |
8
|
|
|
|
|
incurred pursuant to an agreement with our former owner that has
been terminated as of April 15, 2008, as discussed in
Managements Discussion and Analysis of Financial
Condition and Results of Operations Factors
affecting comparability Settlement with former
owner and Note 2 to our financial statements that are
included elsewhere in this prospectus, and (ii) management
fees and expenses that are no longer paid or that will no longer
be payable following completion of this offering. |
|
|
|
We present Adjusted EBITDA because we consider it to be an
important supplemental measure of our operating performance. We
also make certain compensation decisions based, in part, on our
operating performance, as measured by Adjusted EBITDA. See
Compensation Discussion and Analysis Impact of
Performance on Compensation. All of the adjustments made
in our calculation of Adjusted EBITDA are adjustments to items
that management does not consider to be reflective of our core
operating performance. Management considers our core operating
performance to be that which can be affected by our managers in
any particular period through their management of the resources
that affect our underlying revenue and profit generating
operations during that period. Management fees and expenses and
royalty expenses paid to our former owner are not considered
reflective of our core operating performance. |
Our management uses Adjusted EBITDA:
|
|
|
|
|
in developing our internal budgets and strategic plan;
|
|
|
|
as a measurement of operating performance;
|
|
|
|
as a factor in evaluating the performance of our management for
compensation purposes; and
|
|
|
|
in presentations to the members of our board of directors to
enable our board to have the same measurement basis of operating
performance as are used by management to compare our current
operating results with corresponding prior periods and with the
results of other companies in our industry.
|
|
|
|
|
|
However, Adjusted EBITDA is not a recognized measurement under
U.S. generally accepted accounting principles, or GAAP, and
when analyzing our operating performance, investors should use
Adjusted EBITDA in addition to, and not as an alternative for,
net income, operating income, or any other performance measure
presented in accordance with GAAP, or as an alternative to cash
flow from operating activities or as a measure of our liquidity.
Because not all companies use identical calculations, our
presentation of Adjusted EBITDA may not be comparable to
similarly titled measures of other companies. Adjusted EBITDA
has limitations as an analytical tool, as discussed under
Managements Discussion and Analysis of Financial
Condition and Results of Operations
Non-GAAP Discussion. |
|
|
|
The following table provides a reconciliation of net income
(loss) to Adjusted EBITDA, which is a non-GAAP measure, for the
periods indicated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Nine Months Ended September 30,
|
|
|
2005
|
|
2006
|
|
2007
|
|
2007
|
|
2008
|
|
|
(Restated)(1)
|
|
(Unaudited)
|
|
|
(In thousands)
|
|
Net income (loss)
|
|
$
|
(4,286
|
)
|
|
$
|
598
|
|
|
$
|
1,526
|
|
|
$
|
521
|
|
|
$
|
4,476
|
|
Plus: interest expense net of interest income
|
|
|
2,822
|
|
|
|
1,915
|
|
|
|
1,803
|
|
|
|
1,349
|
|
|
|
1,648
|
|
Plus: income tax expense (benefit)
|
|
|
(3,440
|
)
|
|
|
529
|
|
|
|
1,016
|
|
|
|
347
|
|
|
|
2,868
|
|
Plus: depreciation and amortization
|
|
|
1,879
|
|
|
|
2,396
|
|
|
|
3,300
|
|
|
|
2,319
|
|
|
|
3,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
(3,025
|
)
|
|
|
5,438
|
|
|
|
7,645
|
|
|
|
4,536
|
|
|
|
12,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus: royalty to former
owner(a)
|
|
|
1,619
|
|
|
|
2,678
|
|
|
|
3,782
|
|
|
|
2,585
|
|
|
|
1,612
|
|
Plus: management fees and
expenses(b)
|
|
|
511
|
|
|
|
958
|
|
|
|
296
|
|
|
|
188
|
|
|
|
288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(895
|
)
|
|
$
|
9,074
|
|
|
$
|
11,723
|
|
|
$
|
7,309
|
|
|
$
|
14,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Reflects the royalty fee arrangement with the former owner of
Grand Canyon University in which we agreed to pay a stated
percentage of cash revenue generated by our online programs. As
a result of the settlement of a dispute with our former owner,
we are no longer obligated to pay this royalty, |
9
|
|
|
|
|
although the settlement includes a prepayment of future
royalties that will be amortized in 2008 and future periods. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Factors
affecting comparability Settlement with former
owner and Note 2 to our financial statements, which
are included elsewhere in this prospectus. |
|
|
|
(b) |
|
Reflects management fees and expenses of $0.1 million,
$0.3 million, and $0.3 million for the years ended
December 31, 2005, 2006, and 2007, respectively, and
$0.2 million and $0.3 million for the nine month
periods ended September 30, 2007 and 2008, respectively, to
the general partner of Endeavour Capital, and an aggregate of
$0.4 million and $0.7 million for the years ended
December 31, 2005 and 2006, respectively, to an entity
affiliated with a former director and another affiliated with a
significant stockholder, in each case following their investment
in us. The agreements relating to these arrangements have all
terminated or will terminate by their terms upon the closing of
this offering. See Certain Relationships and Related
Transactions. |
|
|
|
(5) |
|
For a description of the offering and pro forma adjustments, see
Capitalization. |
10
RISK
FACTORS
Investing in our common stock involves a high degree of risk.
Before making an investment in our common stock, you should
carefully consider the following risks and the other information
contained in this prospectus, including our financial statements
and related notes, Managements Discussion and
Analysis of Financial Condition and Results of Operations,
and Regulation. The risks described below are those
that we believe are the material risks we face. Any of the risk
factors described below, and others that we did not anticipate,
could significantly and adversely affect our business,
prospects, financial condition, results of operations, and cash
flows. As a result, the trading price of our common stock could
decline and you may lose all or part of your investment.
Risks
Related to Our Industry
Our
failure to comply with the extensive regulatory requirements
governing our school could result in financial penalties,
restrictions on our operations or growth, or loss of external
financial aid funding for our students.
For our fiscal years ended December 31, 2006 and 2007, we
derived cash receipts equal to approximately 67.9% and 70.2%,
respectively, of our net revenue from tuition financed under
federal student financial aid programs, referred to in this
prospectus as the Title IV programs, which are administered
by the U.S. Department of Education, or Department of
Education. To participate in the Title IV programs, a
school must be authorized by the appropriate state education
agency or agencies, be accredited by an accrediting commission
recognized by the Department of Education, and be certified as
an eligible institution by the Department of Education. In
addition, our operations and programs are regulated by other
state education agencies and additional accrediting commissions.
As a result of these requirements, we are subject to extensive
regulation by the Arizona State Board for Private Postsecondary
Education and education agencies of other states, the Higher
Learning Commission, which is our primary accrediting
commission, specialized accrediting commissions, and the
Department of Education. These regulatory requirements cover the
vast majority of our operations, including our educational
programs, instructional and administrative staff, administrative
procedures, marketing, recruiting, financial operations, and
financial condition. These regulatory requirements also affect
our ability to open additional schools and locations, add new
educational programs, change existing educational programs, and
change our corporate or ownership structure. The agencies that
regulate our operations periodically revise their requirements
and modify their interpretations of existing requirements.
Regulatory requirements are not always precise and clear, and
regulatory agencies may sometimes disagree with the way we have
interpreted or applied these requirements. Any misinterpretation
by us of regulatory requirements could materially adversely
affect us.
If we fail to comply with any of these regulatory requirements,
we could suffer financial penalties, limitations on our
operations, loss of accreditation, termination of or limitations
on our ability to grant degrees and certificates, or limitations
on or termination of our eligibility to participate in the
Title IV programs, each of which could materially adversely
affect us. In addition, if we are charged with regulatory
violations, our reputation could be damaged, which could have a
negative impact on our stock price and our enrollments. We
cannot predict with certainty how all of these regulatory
requirements will be applied, or whether we will be able to
comply with all of the applicable requirements in the future.
If the
Department of Education does not recertify us to continue
participating in the Title IV programs, our students would
lose their access to Title IV program funds, or we could be
recertified but required to accept significant limitations as a
condition of our continued participation in the Title IV
programs.
Department of Education certification to participate in the
Title IV programs lasts a maximum of six years, and
institutions are thus required to seek recertification from the
Department of Education on a regular basis in order to continue
their participation in the Title IV programs. An
institution must also apply for recertification by the
Department of Education if it undergoes a change in control, as
defined by Department of Education regulations, and may be
subject to similar review if it expands its operations or
educational programs in certain ways.
Our most recent recertification, which was issued on a
provisional basis in May 2005 after an extended review by the
Department of Education following the change in control that
occurred in February 2004,
11
contained a number of conditions on our continued participation
in the Title IV programs. At that time we were required by
the Department of Education to post a letter of credit, accept
restrictions on the growth of our program offerings and
enrollment, and receive certain Title IV funds under the
heightened cash monitoring system of payment (pursuant to which
an institution is required to credit students with Title IV
funds prior to obtaining those funds from the Department of
Education) rather than by advance payment (pursuant to which an
institution receives Title IV funds from the Department of
Education in advance of disbursement to students). In October
2006, the Department of Education eliminated the letter of
credit requirement and allowed the growth restrictions to
expire, and in August 2007, it eliminated the heightened
cash monitoring restrictions and returned us to the advance
payment method. We submitted our application for recertification
in March 2008 in anticipation of the expiration of our
provisional certification on June 30, 2008. The Department
of Education did not make a decision on our recertification
application by June 30, 2008 and therefore our
participation in the Title IV programs has been automatically
extended on a month-to-month basis until the Department of
Education makes its decision. See Regulation
Regulation of Federal Student Financial Aid Programs
Eligibility and certification procedures. There can be no
assurance that the Department of Education will recertify us
while the investigation by the Office of Inspector General of
the Department of Education is being conducted, while the qui
tam lawsuit is pending, or at all, or that it will not
impose restrictions as a condition to approving our pending
recertification application or with respect to any future
recertification. If the Department of Education does not renew
or withdraws our certification to participate in the
Title IV programs at any time, our students would no longer
be able to receive Title IV program funds. Similarly, the
Department of Education could renew our certification, but
restrict or delay our students receipt of Title IV
funds, limit the number of students to whom we could disburse
such funds, or place other restrictions on us. Any of these
outcomes would have a material adverse effect on our enrollments
and us.
The
Office of Inspector General of the Department of Education has
commenced an investigation of Grand Canyon University, which is
ongoing and which may result in fines, penalties, other
sanctions, and damage to our reputation in the
industry.
The Office of Inspector General of the Department of Education
is responsible for, among other things, promoting the
effectiveness and integrity of the Department of
Educations programs and operations, including compliance
with applicable statutes and regulations. The Office of
Inspector General performs investigations of alleged violations
of law, including cases of alleged fraud and abuse, or other
identified vulnerabilities, in programs administered or financed
by the Department of Education. On August 14, 2008, the
Office of Inspector General served an administrative subpoena on
Grand Canyon University requiring us to provide certain records
and information related to performance reviews and salary
adjustments for all of our enrollment counselors and managers
from January 1, 2004 to the present. Based on the records
and information requested in the subpoena, we believe the Office
of Inspector General is conducting an investigation focused on
whether we have compensated any of our enrollment counselors or
managers in a manner that violated the Title IV statutory
requirements or the related Department of Education regulations
concerning the payment of incentive compensation based on
success in securing enrollments or financial aid. See
Regulation Regulation of Federal Student
Financial Aid Programs Incentive compensation
rule.
We are currently reviewing documents and emails that may be
responsive to the Office of Inspector Generals subpoena.
The outcome of the Office of Inspector General investigation may
depend in part on information contained in these materials or
any information or testimony that may be provided by former
employees or other third parties.
The Department of Education may impose fines and other monetary
penalties as a result of a violation of the incentive
compensation law and such fines and other monetary penalties may
be substantial. In addition, the Department of Education retains
the authority to impose other sanctions on an institution for
violations of the incentive compensation law. The possible
effects of a determination of a regulatory violation are
described more fully in Regulation Regulation
of Federal Student Financial Aid Programs Potential
effect of regulatory violations. Any such fine or other
sanction could damage our reputation and impose significant
costs on us, which could have a material adverse effect on our
business, prospects, financial condition, and results of
operations. We are cooperating with the Office of Inspector
General to facilitate its investigation, but
12
cannot presently predict the ultimate outcome of the
investigation or any liability or other sanctions that might
result.
We
were recently notified that a qui tam lawsuit has been filed
against us alleging, among other things, that we have improperly
compensated certain of our enrollment counselors, and we may
incur liability, be subject to sanctions, or experience damage
to our reputation as a result of this lawsuit.
On September 11, 2008, we were served with a qui tam
lawsuit that had been filed against us in August 2007, in
the United States District Court for the District of Arizona by
a then-current employee on behalf of the federal government. All
proceedings in the lawsuit had been under seal until
September 5, 2008, when the court unsealed the first
amended complaint, which had been filed on August 11, 2008.
The qui tam lawsuit alleges, among other things, that we
violated the False Claims Act by knowingly making false
statements, and submitting false records or statements, from at
least 2001 to the present, to get false or fraudulent claims
paid or approved, and asserts that we have improperly
compensated certain of our enrollment counselors in violation of
the Title IV law governing compensation of such employees,
and as a result, improperly received Title IV program
funds. See Regulation Regulation of Federal
Student Financial Aid Programs Incentive
compensation rule. The complaint specifically alleges that
some of our compensation practices with respect to our
enrollment personnel, including providing non-cash awards, have
violated the Title IV law governing compensation. While we
believe that our compensation policies and practices at issue in
the complaint have not been based on success in enrolling
students in violation of applicable law, the Department of
Educations regulations and interpretations of the
incentive compensation law do not establish clear criteria for
compliance in all circumstances and some of our practices,
including in respect of non-cash awards, have not been within
the scope of any specific safe harbor provided in
the compensation regulations. The complaint seeks treble the
amount of unspecified damages sustained by the federal
government in connection with our receipt of Title IV
funding, a civil penalty for each violation of the False Claims
Act, attorneys fees, costs, and interest.
A qui tam case is a civil lawsuit brought by one or more
individuals (a relator) on behalf of the federal
government for an alleged submission to the government of a
false claim for payment. The relator, often a current or former
employee, is entitled to a share of the governments
recovery in the case. A qui tam action is always filed
under seal and remains under seal until the government decides
whether to intervene in the case. If the government intervenes,
it takes over primary control of the litigation. If the
government declines to intervene in the case, the relator may
nonetheless elect to continue to pursue the litigation at his or
her own expense on behalf of the government. In our case, the
qui tam lawsuit was initially filed under seal in August
2007 and was unsealed and served on us following the
governments decision not to intervene at this time.
If it were determined that any of our compensation practices
violated the incentive compensation law, we could experience an
adverse outcome in the qui tam litigation and be subject
to substantial monetary liabilities, fines, and other sanctions,
any of which could have a material adverse effect on our
business, prospects, financial condition and results of
operations and could adversely affect our stock price. We cannot
presently predict the ultimate outcome of this qui tam
case or any liability that might result.
Congress
may change the eligibility standards or reduce funding for the
Title IV programs, which could reduce our student
population, revenue, and profit margin.
Political and budgetary concerns significantly affect the
Title IV programs. The Higher Education Act, which is the
federal law that governs the Title IV programs, must be
periodically reauthorized by Congress, and was most recently
reauthorized in August 2008. The new law contains numerous
revisions to the requirements governing the Title IV programs.
See Regulation Regulation of Federal Student
Financial Aid Programs. In addition, Congress must
determine funding levels for the Title IV programs on an
annual basis, and can change the laws governing the
Title IV programs at any time. Because a significant
percentage of our revenue is derived from the Title IV
programs, any action by Congress that significantly reduces
Title IV program funding or our ability or the ability of
our students to participate in the Title IV programs could
require us to seek to arrange for other sources of financial aid
for our students and could materially decrease our student
enrollment. Such a decrease in our enrollment could have a
material adverse effect on us.
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Congressional action could also require us to modify our
practices in ways that could increase our administrative and
regulatory costs.
If we
do not meet specific financial responsibility standards
established by the Department of Education, we may be required
to post a letter of credit or accept other limitations in order
to continue participating in the Title IV programs, or we
could lose our eligibility to participate in the Title IV
programs.
To participate in the Title IV programs, an institution
must either satisfy specific quantitative standards of financial
responsibility prescribed by the Department of Education, or
post a letter of credit in favor of the Department of Education
and possibly accept operating restrictions as well. These
financial responsibility tests are applied to each institution
on an annual basis based on the institutions audited
financial statements, and may be applied at other times, such as
if the institution undergoes a change in control. These tests
may also be applied to an institutions parent company or
other related entity. The operating restrictions that may be
placed on an institution that does not meet the quantitative
standards of financial responsibility include being transferred
from the advance payment method of receiving Title IV funds
to either the reimbursement or the heightened cash monitoring
system, which could result in a significant delay in the
institutions receipt of those funds. For example, when we
were recertified by the Department of Education to participate
in the Title IV programs in May 2005 following the change
in control that occurred in February 2004, the Department of
Education reviewed our fiscal year 2004 audited financial
statements and advised us that our composite score, which is a
standard of financial responsibility derived from a formula
established by the Department of Education, reflected financial
weakness. As a result of this and other concerns about our
administrative capability, the Department of Education required
us to post a letter of credit, accept restrictions on the growth
of our program offerings and enrollment, and receive
Title IV funds under the heightened cash monitoring system
of payment rather than by advance payment. In October 2006, the
Department of Education eliminated the letter of credit
requirement and allowed the growth restrictions to expire, and
in August 2007, it eliminated the heightened cash monitoring
restrictions and returned us to the advance payment method.
However, if, in the future, we fail to satisfy the Department of
Educations financial responsibility standards, we could
experience increased regulatory compliance costs or delays in
our receipt of Title IV funds because we could be required
to post a letter of credit or be subjected to operating
restrictions, or both. Our failure to secure a letter of credit
in these circumstances could cause us to lose our ability to
participate in the Title IV programs, which would
materially adversely affect us.
If we
do not comply with the Department of Educations
administrative capability standards, we could suffer financial
penalties, be required to accept other limitations in order to
continue participating in the Title IV programs, or lose
our eligibility to participate in the Title IV
programs.
To continue participating in the Title IV programs, an
institution must demonstrate to the Department of Education that
the institution is capable of adequately administering the
Title IV programs under specific standards prescribed by
the Department of Education. These administrative capability
criteria require, among other things, that the institution has
an adequate number of qualified personnel to administer the
Title IV programs, has adequate procedures for disbursing
and safeguarding Title IV funds and for maintaining
records, submits all required reports and financial statements
in a timely manner, and does not have significant problems that
affect the institutions ability to administer the
Title IV programs. If we fail to satisfy any of these
criteria, the Department of Education may assess financial
penalties against us, restrict the manner in which the
Department of Education delivers Title IV funds to us,
place us on provisional certification status, or limit or
terminate our participation in the Title IV programs, any
of which could materially adversely affect us. When we were
recertified by the Department of Education to participate in the
Title IV programs in May 2005 following the change in
control that occurred in February 2004, the Department of
Education required us to post a letter of credit, accept
restrictions on the growth of our program offerings and
enrollment, and receive Title IV funds under the heightened
cash monitoring system of payment rather than by advance
payment, due to the Department of Educations concerns
about our administrative capability combined with our financial
weakness under the Department of Educations standards of
financial responsibility.
14
We
would lose our ability to participate in the Title IV
programs if we fail to maintain our institutional accreditation,
and our student enrollments could decline if we fail to maintain
any of our accreditations or approvals.
An institution must be accredited by an accrediting commission
recognized by the Department of Education in order to
participate in the Title IV programs. We have institutional
accreditation by the Higher Learning Commission, which is an
accrediting commission recognized by the Department of
Education. To remain accredited, we must continuously meet
accreditation standards relating to, among other things,
performance, governance, institutional integrity, educational
quality, faculty, administrative capability, resources, and
financial stability. We were reaccredited by the Higher Learning
Commission in 2007 for the maximum term of 10 years. While
the Higher Learning Commission concluded that we were in
compliance with its accreditation standards, it did note certain
deficiencies to be addressed by us. See
Regulation Accreditation. In February
2009, we must file a monitoring report with the Higher Learning
Commission addressing our progress in resolving these
deficiencies. If we fail to resolve the Higher Learning
Commissions concerns, the Higher Learning Commission could
ask for another monitoring report, send a team to confirm
progress in addressing the deficiencies, or determine that we
are not making adequate progress in addressing the Higher
Learning Commissions concerns. If we fail to satisfy any
of the Higher Learning Commissions standards, or fail to
address the deficiencies noted in our last review, we could lose
our accreditation by the Higher Learning Commission, which would
cause us to lose our eligibility to participate in the
Title IV programs and could cause a significant decline in
our total student enrollments and have a material adverse effect
on us. In addition, many of our individual educational programs
are also accredited by specialized accrediting commissions or
approved by specialized state agencies. If we fail to satisfy
the standards of any of those specialized accrediting
commissions or state agencies, we could lose the specialized
accreditation or approval for the affected programs, which could
result in materially reduced student enrollments in those
programs and have a material adverse effect on us.
If we
do not maintain our state authorization in Arizona, we may not
operate or participate in the Title IV
programs.
A school that grants degrees or certificates must be authorized
by the relevant education agency of the state in which it is
located. We are located in the state of Arizona and are
authorized by the Arizona State Board for Private Postsecondary
Education. State authorization is also required for our students
to be eligible to receive funding under the Title IV
programs. To maintain our state authorization, we must
continuously meet standards relating to, among other things,
educational programs, facilities, instructional and
administrative staff, marketing and recruitment, financial
operations, addition of new locations and educational programs,
and various operational and administrative procedures. If we
fail to satisfy any of these standards, we could lose our
authorization by the Arizona State Board for Private
Postsecondary Education to offer our educational programs, which
would also cause us to lose our eligibility to participate in
the Title IV programs and have a material adverse effect on
us.
If a
substantial number of our students cannot secure Title IV
loans as a result of decreased lender participation in the
Title IV programs or if lenders increase the costs or
reduce the benefits associated with the Title IV loans they
provide, we could be materially adversely
affected.
The cumulative impact of recent regulatory and market
developments and conditions, including the widespread disruption
in the credit markets, has caused some lenders to cease
providing Title IV loans to students, including some
lenders that have previously provided Title IV loans to our
students. Other lenders have reduced the benefits and increased
the fees associated with the Title IV loans they provide.
We and other schools have had to modify student loan practices
in ways that could result in higher administrative costs. If the
cost of Title IV loans increases or availability decreases,
some students may not be able to take out loans and may not
enroll in a postsecondary institution. In May 2008, new federal
legislation was enacted to attempt to ensure that all eligible
students will be able to obtain Title IV loans in the
future and that a sufficient number of lenders will continue to
provide Title IV loans. Among other things, the new
legislation:
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authorizes the Department of Education to purchase Title IV
loans from lenders, thereby providing capital to the lenders to
enable them to continue making Title IV loans to students;
and
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permits the Department of Education to designate institutions
eligible to participate in a lender of last resort
program, under which federally recognized student loan guaranty
agencies will be required to make Title IV loans to all
otherwise eligible students at those institutions.
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We cannot predict if this legislation will be effective in
ensuring students access to Title IV loans. If a
substantial number of lenders cease to participate in the
Title IV loan programs, increase the costs of student
access to such programs, or reduce the benefits available under
such programs, our students may not have access to such loans,
which could cause our enrollments to decline and have a material
adverse effect on us.
An
increase in interest rates could adversely affect our ability to
attract and retain students.
For our fiscal years ended December 31, 2006 and 2007 we
derived cash receipts equal to approximately 67.9% and 70.2%,
respectively, of our net revenue from tuition financed under the
Title IV programs, which include student loans with
interest rates subsidized by the federal government.
Additionally, some of our students finance their education
through private loans that are not subsidized. If our
students employment circumstances are adversely affected
by regional or national economic downturns, they may be more
heavily dependent on student loans. Interest rates have reached
relatively low levels in recent years, creating a favorable
borrowing environment for students. However, in the event
interest rates increase or Congress decreases the amount
available for federal student aid, our students may have to pay
higher interest rates on their loans. Any future increase in
interest rates will result in a corresponding increase in
educational costs to our existing and prospective students,
which could result in a significant reduction in our student
population and revenues. Higher interest rates could also
contribute to higher default rates with respect to our
students repayment of their education loans. Higher
default rates may in turn adversely impact our eligibility to
participate in some or all of the Title IV programs, which
could result in a significant reduction in our student
population and our profitability. See We may lose our
eligibility to participate in the Title IV programs if our
student loan default rates are too high located elsewhere
in Risk Factors for further information.
Our
failure to comply with the regulatory requirements of states
other than Arizona could result in actions taken by those states
that could have a material adverse effect on our
enrollments.
Almost every state imposes regulatory requirements on
educational institutions that have physical facilities located
within the states boundaries. These regulatory
requirements establish standards in areas such as educational
programs, facilities, instructional and administrative staff,
marketing and recruitment, financial operations, addition of new
locations and educational programs, and various operational and
administrative procedures, some of which are different than the
standards prescribed by the Department of Education or the
Arizona State Board for Private Postsecondary Education. In
addition, several states have sought to assert jurisdiction over
educational institutions offering online degree programs that
have no physical location or other presence in the state but
that have some activity in the state, such as enrolling or
offering educational services to students who reside in the
state, employing faculty who reside in the state, or advertising
to or recruiting prospective students in the state. State
regulatory requirements for online education vary among the
states, are not well developed in many states, are imprecise or
unclear in some states, and can change frequently. In the
future, states could coordinate their efforts in order to more
aggressively attempt to regulate or restrict schools
offering of online education.
In addition to Arizona, we have determined that our activities
in certain states constitute a presence requiring licensure or
authorization under the requirements of the state education
agency in those states. In certain other states, we have
obtained approvals to operate as we have determined necessary in
connection with our marketing and recruiting activities. If we
fail to comply with state licensing or authorization
requirements for a state, or fail to obtain licenses or
authorizations when required, we could lose our state licensure
or authorization by that state or be subject to other sanctions,
including restrictions on our activities in that state, fines,
and penalties. The loss of licensure or authorization in a state
other than Arizona could prohibit us from recruiting prospective
students or offering educational services to current students in
that state, which could significantly reduce our enrollments and
revenues and materially adversely effect us.
State laws and regulations are not always precise or clear, and
regulatory agencies may sometimes disagree with the way we have
interpreted or applied these requirements. Any misinterpretation
by us of these
16
regulatory requirements or adverse changes in regulations or
interpretations thereof by regulators could materially adversely
affect us.
The
inability of our graduates to obtain a professional license or
certification in their chosen field of study could reduce our
enrollments and revenues, and potentially lead to student claims
against us that could be costly to us.
Many of our students, particularly those in our education and
healthcare programs, seek a professional license or
certification in their chosen fields following graduation. A
students ability to obtain a professional license or
certification depends on several factors, including whether the
institution and the students program were accredited by a
particular accrediting commission or approved by a professional
association or by the state in which the student seeks
employment. Additional factors are outside the control of the
institution, such as the individual students own
background and qualifications. If one or more states refuse to
recognize a significant number of our students for professional
licensing or certification based on factors relating to our
institution or programs, the potential growth of those programs
would be negatively impacted and we could be exposed to claims
or litigation by students or graduates based on their inability
to obtain their desired professional license or certification,
each of which could materially adversely affect us.
Increased
scrutiny by various governmental agencies regarding
relationships between student loan providers and educational
institutions and their employees have produced significant
uncertainty concerning restrictions applicable to the
administration of the Title IV loan programs and the
funding for those programs which, if not satisfactorily or
timely resolved, could result in increased regulatory burdens
and costs for us and could adversely affect our student
enrollments.
During 2007 and 2008, student loan programs, including the
Title IV programs, have come under increased scrutiny by
the Department of Education, Congress, state attorneys general,
and other parties. Issues that have received extensive attention
include allegations of conflicts of interest between some
institutions and lenders that provide Title IV loans,
questionable incentives given by lenders to some schools and
school employees, allegations of deceptive practices in the
marketing of student loans, and schools leading students to use
certain lenders. Several institutions and lenders have been
cited for these problems and have paid several million dollars
in the aggregate to settle those claims. The practices of
numerous other schools and lenders are being examined by
government agencies at the federal and state level. The Attorney
General of the State of Arizona requested extensive
documentation and information from us and other institutions in
Arizona concerning student loan practices, and we provided
testimony in response to a subpoena from the Attorney General of
the State of Arizona about such practices. We have agreed with
the Attorney General of the State of Arizona to conclude this
matter by executing a Letter of Assurance, whereby we will agree
to conduct referrals of students to lenders in accordance with
our existing policies or any new policies promulgated by the
State of Arizona in the future, and by reimbursing the state for
the costs of its investigation in the amount of approximately
$20,000.
As a result of this scrutiny, Congress has passed new laws, the
Department of Education has enacted stricter regulations, and
several states have adopted codes of conduct or enacted state
laws that further regulate the conduct of lenders, schools, and
school personnel. These new laws and regulations, among other
things, limit schools relationships with lenders, restrict
the types of services that schools may receive from lenders,
prohibit lenders from providing other types of loans to students
in exchange for Title IV loan volume from schools, require
schools to provide additional information to students concerning
institutionally preferred lenders, and significantly reduce the
amount of federal payments to lenders who participate in the
Title IV loan programs. The environment surrounding access
to and cost of student loans remains in a state of flux, with
reviews of many institutions and lenders still pending and with
additional legislation and regulatory changes being actively
considered at the federal and state levels. The uncertainty
surrounding these issues, and any resolution of these issues
that increases loan costs or reduces students access to
Title IV loans, may adversely affect our student
enrollments, which could have an adverse effect on us.
17
Government
agencies, regulatory agencies, and third parties may conduct
compliance reviews, bring claims, or initiate litigation against
us based on alleged violations of the extensive regulatory
requirements applicable to us, which could require us to pay
monetary damages, be sanctioned or limited in our operations,
and expend significant resources to defend against those
claims.
Because we operate in a highly regulated industry, we are
subject to program reviews, audits, investigations, claims of
non-compliance, and lawsuits by government agencies, regulatory
agencies, students, stockholders, and other third parties
alleging non-compliance with applicable legal requirements, many
of which are imprecise and subject to interpretation. As we grow
larger, this scrutiny of our business may increase. If the
result of any such proceeding is unfavorable to us, we may lose
or have limitations imposed on our state licensing,
accreditation, or Title IV program participation; be
required to pay monetary damages (including triple damages in
certain whistleblower suits); or be subject to fines,
injunctions, or other penalties, any of which could have a
material adverse effect on our business, prospects, financial
condition, and results of operations. In this regard, we are
currently subject to an investigation by the Department of
Educations Office of Inspector General, which we believe
is focused on the manner in which we have compensated our
enrollment counselors and managers, and a qui tam lawsuit
brought by a former employee alleging violations in the same
area. See Risk Factors The Office of Inspector
General of the Department of Education has commenced an
investigation of Grand Canyon University, which is ongoing and
which may result in fines, penalties, other sanctions, and
damage to our reputation in the industry, Risk
Factors We were recently notified that a qui
tam lawsuit has been filed against us alleging, among other
things, that we have improperly compensated certain of our
enrollment counselors, and we may incur liability, be subject to
sanctions, or experience damage to our reputation as a result of
this lawsuit, and Regulation Regulation
of Federal Student Financial Aid Programs Incentive
compensation rule. Claims and lawsuits brought against us,
even if they are without merit, may also result in adverse
publicity, damage our reputation, negatively affect the market
price of our stock, adversely affect our student enrollments,
and reduce the willingness of third parties to do business with
us. Even if we adequately address the issues raised by any such
proceeding and successfully defend against it, we may have to
devote significant financial and management resources to address
these issues, which could harm our business.
A
decline in the overall growth of enrollment in postsecondary
institutions, or in the number of students seeking degrees in
our core disciplines, could cause us to experience lower
enrollment at our schools, which could negatively impact our
future growth.
According to a September 2008 report from the NCES, enrollment
in degree-granting, postsecondary institutions is projected to
grow 12.0% over the ten-year period ending fall 2016 to
approximately 19.9 million. This growth is slower than the
23.6% increase reported in the prior ten-year period ended in
fall 2006, when enrollment increased from 14.4 million in
1996 to 17.8 million in 2006. In addition, according to a
March 2008 report from the Western Interstate Commission
for Higher Education, the number of high school graduates that
are eligible to enroll in
degree-granting,
postsecondary institutions is expected to peak at approximately
3.3 million for the class of 2008, falling in the period
between
2007-08 and
2013-14 by
about 150,000 in total before resuming a growth pattern for the
foreseeable future thereafter. In order to maintain current
growth rates, we will need to attract a larger percentage of
students in existing markets and expand our markets by creating
new academic programs. In addition, if job growth in the fields
related to our core disciplines is weaker than expected, as a
result of any regional or national economic downturn or
otherwise, including since the 2007 BLS report predicting strong
job growth in these disciplines was completed, fewer students
may seek the types of degrees that we offer. Our failure to
attract new students, or the decisions by prospective students
to seek degrees in other disciplines, would have an adverse
impact on our future growth.
If our
students were unable to obtain private loans from third-party
lenders, our business could be adversely affected given our
increasing reliance on such lenders as a source of net
revenue.
During the fiscal year ended December 31, 2007, private
loans to students at our school represented approximately 5.1%
of our revenue (calculated on a cash basis) as compared to 2.5%
of revenue in fiscal 2006 and 1.9% of revenue in fiscal 2005.
These loans were provided pursuant to private loan programs and
were made available to eligible students to fund a portion of
the students costs of education not covered by the
Title IV programs and state financial aid sources. Private
loans are made to our students by lending
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institutions and are non-recourse to us. Recent adverse market
conditions for consumer and federally guaranteed student loans
(including lenders increasing difficulties in reselling or
syndicating student loan portfolios) have resulted, and could
continue to result, in providers of private loans reducing the
availability of or increasing the costs associated with
providing private loans to postsecondary students. In
particular, loans to students with low credit scores who would
not otherwise be eligible for credit-based private loans have
become increasingly difficult to obtain. Prospective students
may find that these increased financing costs make borrowing
prohibitively expensive and abandon or delay enrollment in
postsecondary education programs. If any of these scenarios were
to occur, our students ability to finance their education
could be adversely affected and our student population could
decrease, which could have a material adverse effect on our
business, prospects, financial condition, and results of
operations.
If any
of the education regulatory agencies that regulate us do not
approve or delay their approval of any transaction involving us
that constitutes a change in control, our ability to
operate or participate in the Title IV programs may be
impaired.
If we experience a change in control under the standards of the
Department of Education, the Arizona State Board for Private
Postsecondary Education, the Higher Learning Commission, or any
other applicable state education agency or accrediting
commission, we must notify or seek the approval of each such
agency. These agencies do not have uniform criteria for what
constitutes a change in control. Transactions or events that
typically constitute a change in control include significant
acquisitions or dispositions of the voting stock of an
institution or its parent company, and significant changes in
the composition of the board of directors of an institution or
its parent company. Some of these transactions or events may be
beyond our control. Our failure to obtain, or a delay in
receiving, approval of any change in control from the Department
of Education, the Arizona State Board for Private Postsecondary
Education, or the Higher Learning Commission could impair our
ability to operate or participate in the Title IV programs,
which could have a material adverse effect on our business and
financial condition. Our failure to obtain, or a delay in
receiving, approval of any change in control from any other
state in which we are currently licensed or authorized, or from
any of our specialized accrediting commissions, could require us
to suspend our activities in that state or suspend offering the
applicable programs until we receive the required approval, or
could otherwise impair our operations. The potential adverse
effects of a change in control could influence future decisions
by us and our stockholders regarding the sale, purchase,
transfer, issuance, or redemption of our stock, which could
discourage bids for your shares of our stock and could have an
adverse effect on the market price of your shares.
We have submitted a description of the offering to the
Department of Education, including a description of a voting
agreement that certain of our stockholders will enter into in
connection with this offering. See Certain Relationships
and Related Transactions Voting Agreement. The
Department of Education has informed us that the offering will
not trigger a change in ownership resulting in a change in
control under the Department of Educations regulations.
The Higher Learning Commission has informed us that it will
consider the offering to be a change in control under its
policies, and we have obtained the Higher Learning
Commissions approval to consummate the offering. As a
result of its determination that the offering will be a change
in control, the Higher Learning Commission has informed us that
it will conduct a site visit within six months of consummation
of the offering to confirm the appropriateness of the approval
and to evaluate whether we continue to meet the Higher Learning
Commissions eligibility criteria. In addition, based on
our communications with the Arizona State Board for Private
Postsecondary Education, we believe the offering will be a
change in control under Arizona law. Accordingly, following the
consummation of the offering, we will be required to file an
application with the Arizona State Board for Private
Postsecondary Education in order to obtain such approval. We
cannot predict whether the Higher Learning Commission or the
Arizona State Board for Private Postsecondary Education will
impose any limitations or conditions on us, or identify any
compliance issues related to us in the context of the change in
control process, that could result in our loss of accreditation
or authorization by such agency, as applicable. Any such loss of
accreditation or authorization would result in our loss of
eligibility to participate in the Title IV programs and
cause a significant decline in our student enrollments.
We also notified other accrediting commissions and state
agencies, as we believed necessary, of this offering and the
reasons why we believe this offering will not constitute a
change in control under their
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respective standards, or to determine what is required if any
such commission or agency does consider the offering to
constitute a change in control.
We are
subject to sanctions if we pay impermissible commissions,
bonuses, or other incentive payments to persons involved in
certain recruiting, admissions, or financial aid
activities.
A school participating in the Title IV programs may not
provide, or contract with a third party that provides, any
commission, bonus, or other incentive payment based on success
in enrolling students or securing financial aid to any person
involved in student recruiting or admission activities or in
making decisions regarding the awarding of Title IV program
funds. The Department of Educations regulations set forth
12 safe harbors which describe payments and
arrangements that do not violate the incentive compensation
rule. The Department of Educations regulations make clear
that the safe harbors are not a complete list of permissible
practices under this law. One of these safe harbors permits
adjustments to fixed salary for enrollment personnel provided
that such adjustments are not made more than twice during any
twelve month period, and that any adjustment is not based solely
on the number of students recruited, admitted, enrolled, or
awarded financial aid. While we believe that our compensation
policies and practices have not been based on success in
enrolling students in violation of applicable law, the
Department of Educations regulations and interpretations
of the incentive compensation law do not establish clear
criteria for compliance in all circumstances and, in a limited
number of instances, our actions have not been within the scope
of any specific safe harbor provided in the compensation
regulations. In addition, such safe harbors do not address
non-cash awards to enrollment personnel.
As described in Risk Factors The Office of
Inspector General of the Department of Education has commenced
an investigation of Grand Canyon University, which is ongoing
and which may result in fines, penalties, other sanctions, and
damage to our reputation in the industry, and in
Regulation Regulation of Federal Student
Financial Aid Programs Incentive compensation
rule, we are currently subject to an investigation by the
Department of Educations Office of Inspector General,
which we believe is focused on the manner in which we have
compensated our enrollment counselors and managers. In addition,
in recent years several
for-profit
education companies, including us, have been faced with
whistleblower lawsuits, known as qui tam
cases, by current or former employees alleging violations of
this prohibition. See Risk Factors We were
recently notified that a qui tam lawsuit has been filed
against us alleging, among other things, that we have improperly
compensated certain of our enrollment counselors, and we may
incur liability, be subject to sanctions, or experience damage
to our reputation as a result of this lawsuit. If the
Department of Education determines as a result of the pending
investigation that we have violated this law, if we are found to
be liable in the pending qui tam action, or if we or any
third parties we have engaged otherwise violate this law, we
could be fined or sanctioned by the Department of Education, or
subjected to other monetary liability or penalties that could be
substantial, any of which could harm our reputation, impose
significant costs on us, and have a material adverse effect on
our business, prospects, financial condition, and results of
operations.
Our
reputation and our stock price may be negatively affected by the
actions of other postsecondary educational
institutions.
In recent years, regulatory proceedings and litigation have been
commenced against various postsecondary educational institutions
relating to, among other things, deceptive trade practices,
false claims against the government, and non-compliance with
Department of Education requirements, state education laws, and
state consumer protection laws. These proceedings have been
brought by the Department of Education, the U.S. Department
of Justice, the U.S. Securities and Exchange Commission, or
SEC, and state governmental agencies, among others. These
allegations have attracted adverse media coverage and have been
the subject of legislative hearings and regulatory actions at
both the federal and state levels, focusing not only on the
individual schools but in some cases on the larger for-profit
postsecondary education sector as a whole. Adverse media
coverage regarding other for-profit education companies or other
educational institutions could damage our reputation, result in
lower enrollments, revenues, and operating profit, and have a
negative impact on our stock price. Such coverage could also
result in increased scrutiny and regulation by the Department of
Education, Congress, accrediting commissions, state
legislatures, state attorneys general, or other governmental
authorities of all educational institutions, including us.
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If the
percentage of our revenue that is derived from the Title IV
programs is too high, we may lose our eligibility to participate
in those programs.
A for-profit institution loses its eligibility to participate in
the Title IV programs if, under a formula that requires
cash basis accounting and other adjustments to the calculation
of revenue, it derives more than 90% of its revenues from those
programs in any fiscal year. The period of ineligibility is at
least the next succeeding fiscal year, and any Title IV
funds already received by the institution and its students in
that succeeding year would have to be returned to the applicable
lender or the Department of Education. Using the Department of
Educations formula for this test, we have calculated that,
for our 2006 and 2007 fiscal years, we derived approximately
71.5% and 74.0%, respectively, of our revenue from the
Title IV programs. The August 2008 reauthorization of the
Higher Education Act makes significant changes to this revenue
requirement, effective upon the date of the laws
enactment. Under the new law, an institution will be subject to
loss of eligibility to participate in the Title IV programs
only if it exceeds the 90% threshold for two consecutive years,
the period of ineligibility is extended to at least two years,
and an institution whose rate exceeds 90% for any single year
will be placed on provisional certification. Recent changes in
federal law that increased Title IV grant and loan limits,
and any additional increases in the future, may result in an
increase in the revenues we receive from the Title IV
programs. Economic downturns that adversely affect our
students employment circumstances could also increase
their reliance on Title IV programs. These developments could
make it more difficult for us to satisfy this requirement.
Exceeding the 90% threshold and losing our eligibility to
participate in the Title IV programs would have a material
adverse effect on our business, prospects, financial condition,
and results of operations.
We may
lose our eligibility to participate in the Title IV
programs if our student loan default rates are too
high.
An institution may lose its eligibility to participate in some
or all of the Title IV programs if, for three consecutive
years, 25% or more of its students who were required to begin
repayment on their student loans in one year default on their
payment by the end of the following year. In addition, an
institution may lose its eligibility to participate in some or
all of the Title IV programs if the default rate of its
students exceeds 40% for any single year. The August 2008
reauthorization of the Higher Education Act extends by one year
the period for which students defaults on their loans will
be included in the calculation of an institutions default
rate, a change that is expected to increase most
institutions default rates. The new law also increases the
threshold for an institution to lose its eligibility to
participate in the relevant Title IV programs from 25% to
30%. These changes to the law take effect for institutions
cohort default rates for federal fiscal year 2009, which are
expected to be calculated and issued by the Department of
Education in 2012. Although our cohort default rates have
historically been significantly below these levels, we cannot
assure you that this will continue to be the case. Any increase
in interest rates or declines in income or job losses for our
students could contribute to higher default rates on student
loans. Exceeding the student loan default rate thresholds and
losing our eligibility to participate in the Title IV
programs would have a material adverse effect on our business,
prospects, financial condition, and results of operations. Any
future changes in the formula for calculating student loan
default rates, economic conditions, or other factors that cause
our default rates to increase, could place us in danger of
losing our eligibility to participate in some or all of the
Title IV programs and materially adversely affect us.
We are
subject to sanctions if we fail to correctly calculate and
timely return Title IV program funds for students who
withdraw before completing their educational
program.
A school participating in the Title IV programs must
calculate the amount of unearned Title IV program funds
that it has disbursed to students who withdraw from their
educational programs before completing such programs and must
return those unearned funds to the appropriate lender or the
Department of Education in a timely manner, generally within
45 days of the date the school determines that the student
has withdrawn. If the unearned funds are not properly calculated
and timely returned for a sufficient percentage of students, we
may have to post a letter of credit in favor of the Department
of Education equal to 25% of the Title IV funds that should
have been returned for such students in the prior fiscal year,
and we could be fined or otherwise sanctioned by the Department
of Education, which could increase our cost of regulatory
compliance and materially adversely affect us.
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We
cannot offer new programs, expand our operations into certain
states, or acquire additional schools if such actions are not
timely approved by the applicable regulatory agencies, and we
may have to repay Title IV funds disbursed to students
enrolled in any such programs, schools, or states if we do not
obtain prior approval.
Our expansion efforts include offering new educational programs.
In addition, we may increase our operations in additional states
and seek to acquire existing schools from other companies. If we
are unable to obtain the necessary approvals for such new
programs, operations, or acquisitions from the Department of
Education, the Higher Learning Commission, the Arizona State
Board for Private Postsecondary Education, or any other
applicable state education agency or accrediting commission, or
if we are unable to obtain such approvals in a timely manner,
our ability to consummate the planned actions and provide
Title IV funds to any affected students would be impaired,
which could have a material adverse effect on our expansion
plans. If we were to determine erroneously that any such action
did not need approval or had all required approvals, we could be
liable for repayment of the Title IV program funds provided
to students in that program or at that location.
Risks
Related to Our Business
Our
success depends, in part, on the effectiveness of our marketing
and advertising programs in recruiting new
students.
Building awareness of Grand Canyon University and the programs
we offer is critical to our ability to attract prospective
students. It is also critical to our success that we convert
prospective students to enrolled students in a cost-effective
manner and that these enrolled students remain active in our
programs. Some of the factors that could prevent us from
successfully recruiting, enrolling, and retaining students in
our programs include:
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the reduced availability of, or higher interest rates and other
costs associated with, Title IV loan funds or other sources
of financial aid;
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the emergence of more successful competitors;
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factors related to our marketing, including the costs and
effectiveness of Internet advertising and broad-based branding
campaigns and recruiting efforts;
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performance problems with our online systems;
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failure to maintain institutional and specialized accreditations;
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the requirements of the education agencies that regulate us
which restrict schools initiation of new programs and
modification of existing programs;
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the requirements of the education agencies that regulate us
which restrict the ways schools can compensate their recruitment
personnel;
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increased regulation of online education, including in states in
which we do not have a physical presence;
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restrictions that may be imposed on graduates of online programs
that seek certification or licensure in certain states;
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student dissatisfaction with our services and programs;
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adverse publicity regarding us, our competitors, or online or
for-profit education generally;
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price reductions by competitors that we are unwilling or unable
to match;
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a decline in the acceptance of online education;
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an adverse economic or other development that affects job
prospects in our core disciplines; and
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a decrease in the perceived or actual economic benefits that
students derive from our programs.
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If we are unable to continue to develop awareness of Grand
Canyon University and the programs we offer, and to recruit,
enroll, and retain students, our enrollments would suffer and
our ability to increase revenues and maintain profitability
would be significantly impaired.
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If we
are unable to hire and train new and existing employees
responsible for student recruitment, the effectiveness of our
student recruiting efforts would be adversely
affected.
In order to support our planned revenue growth we intend to
hire, develop, and train a significant number of additional
employees responsible for student recruitment and retain and
continue to develop and train our current student recruitment
personnel. Our ability to develop and maintain a strong student
recruiting function may be affected by a number of factors,
including our ability to integrate and motivate our enrollment
counselors, our ability to effectively train our enrollment
counselors, the length of time it takes new enrollment
counselors to become productive, regulatory restrictions on the
method of compensating enrollment counselors, and the
competition in hiring and retaining enrollment counselors. If we
are unable to hire, develop, and retain a sufficient number of
qualified enrollment counselors, our ability to increase
enrollments would be adversely affected.
We
will incur increased costs as a result of being a public
company, and the requirements of being a public company may
divert management attention from our business.
As a public company, we will be subject to a number of
additional requirements, including the reporting requirements of
the Securities Exchange Act of 1934, as amended, or the Exchange
Act, the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act and
the listing standards of Nasdaq. These requirements will cause
us to incur increased costs and might place a strain on our
systems and resources. The Exchange Act requires, among other
things, that we file annual, quarterly, and current reports with
respect to our business and financial condition. The
Sarbanes-Oxley Act requires, among other things, that we
maintain effective disclosure controls and procedures and
internal control over financial reporting, and also requires
that our internal controls be assessed by management and
attested to by our auditors as of December 31 of each year
commencing with our year ending December 31, 2009. In order
to maintain and improve the effectiveness of our disclosure
controls and procedures and internal control over financial
reporting, significant resources and management oversight will
be required. As a result, our managements attention might
be diverted from other business concerns, which could have a
material adverse effect on our business, prospects, financial
condition, and results of operations. Furthermore, we might not
be able to retain our independent directors or attract new
independent directors for our committees.
We have material weaknesses in our internal control over
financial reporting. If we fail to develop or maintain an
effective system of internal controls, we may not be able to
accurately report our financial results or prevent fraud. As a
result, current and potential stockholders could lose confidence
in our financial reporting, which would harm our business and
the trading price of our common stock.
During the preparation of our financial statements for 2005,
2006, and 2007, and for the six month period ended June 30,
2008, our management identified material weaknesses in our
internal control over financial reporting, as defined in the
standards established by the American Institute of Certified
Public Accountants, that affected our financial statements for
each of the periods covered by such statements. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Internal Control
Over Financial Reporting. We have restated our financial
statements as of December 31, 2006 and 2007 and for the
years ended December 31, 2005, 2006, and 2007. See
Note 3, Restatement of Financial Statements, to
our financial statements.
We are currently in the process of remediating these material
weaknesses, but have not yet been able to complete our
remediation efforts. See Managements Discussion and
Analysis of Financial Condition and Results of
Operations Internal Control Over Financial
Reporting. It will take additional time to design,
implement, and test the controls and procedures required to
enable our management to conclude that our internal control over
financial reporting is effective. We cannot at this time
estimate how long it will take to complete our remediation
efforts. We cannot assure you that measures we plan to take will
be effective in mitigating or preventing significant
deficiencies or material weaknesses in our internal control over
financial reporting. Any failure to maintain or implement
required new or improved controls, or any difficulties we
encounter in their implementation, could result in additional
material weaknesses, cause us to fail to meet our periodic
reporting obligations or result in material misstatements in our
financial statements. Any such failure could also adversely
affect the results of periodic management evaluations and annual
auditor attestation reports regarding the effectiveness of our
internal control over financial reporting that will be required
when
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the SECs rules under Section 404 of the
Sarbanes-Oxley Act of 2002 become applicable to us beginning
with our Annual Report on
Form 10-K
for the year ending December 31, 2009, to be filed in early
2010. The existence of a material weakness could result in
errors in our financial statements that could result in further
restatements of our financial statements, cause us to fail to
meet our reporting obligations and cause investors to lose
confidence in our reported financial information, leading to a
decline in our stock price.
We
operate in a highly competitive industry, and competitors with
greater resources could harm our business.
The postsecondary education market is highly fragmented and
competitive. We compete for students with traditional public and
private two-year and four-year colleges and universities and
other for-profit schools, including those that offer online
learning programs. Many public and private schools, colleges,
and universities, including most major colleges and
universities, offer online programs. We expect to experience
additional competition in the future as more colleges,
universities, and for-profit schools offer an increasing number
of online programs. Public institutions receive substantial
government subsidies, and public and private non-profit
institutions have access to government and foundation grants,
tax-deductible contributions, and other financial resources
generally not available to for-profit schools. Accordingly,
public and private non-profit institutions may have
instructional and support resources superior to those in the
for-profit sector, and public institutions can offer
substantially lower tuition prices. Some of our competitors in
both the public and private sectors also have substantially
greater financial and other resources than we do. We may not be
able to compete successfully against current or future
competitors and may face competitive pressures that could
adversely affect our business, prospects, financial condition,
and results of operations. These competitive factors could cause
our enrollments, revenues, and profitability to significantly
decrease. See Business Competition for
further information.
Capacity
constraints, system disruptions, or security breaches in our
online computer networks could have a material adverse effect on
our ability to attract and retain students.
The performance and reliability of the infrastructure of our
online operations are critical to our reputation and to our
ability to attract and retain students. Any computer system
disruption or failure, or a sudden and significant increase in
traffic on the servers that host our online operations, may
result in our online courses and programs being unavailable for
a period of time. In addition, any significant failure of our
computer networks or servers could disrupt our on-campus
operations. Individual, sustained, or repeated occurrences could
significantly damage the reputation of our online operations and
result in a loss of potential or existing students.
Additionally, our online operations are vulnerable to
interruption or malfunction due to events beyond our control,
including natural disasters and network and telecommunications
failures. Our computer networks may also be vulnerable to
unauthorized access, computer hackers, computer viruses, and
other security problems. A user who circumvents security
measures could misappropriate proprietary information or cause
interruptions to or malfunctions in operations. As a result, we
may be required to expend significant resources to protect
against the threat of these security breaches or to alleviate
problems caused by these incidents. Any interruption to our
online operations could have a material adverse effect on our
ability to attract students to our online programs and to retain
those students.
We may
not be able to successfully implement our growth strategy if we
are not able to improve the content of our existing academic
programs or to develop new programs on a timely basis and in a
cost-effective
manner, or at all.
We continually seek to improve the content of our existing
programs and develop new programs in order to meet changing
market needs. The success of any of our programs and courses,
both ground and online, depends in part on our ability to expand
the content of our existing programs, develop new programs in a
cost-effective
manner, and meet the needs of existing and prospective students
and employers in a timely manner, as well as on the acceptance
of our actions by existing or prospective students and
employers. As of September 30, 2008, we offered 79 fully
online programs, 17 of which we introduced in 2007, 12 of which
we introduced in the first nine months of 2008, and many of
which were based on our existing ground programs. In the future,
we may develop programs solely, or initially, for online use,
which may pose new challenges, including the need to develop
course content without having an existing program on which such
content can
24
be based. Even if we are able to develop acceptable new
programs, we may not be able to introduce these new programs in
a timely fashion or as quickly as our competitors are able to
introduce competing programs. If we do not respond adequately to
changes in market conditions, our ability to attract and retain
students could be impaired and our business, prospects,
financial condition, and results of operations could suffer.
The development and approval of new programs and courses, both
ground and online, are subject to requirements and limitations
imposed by the Department of Education, state licensing
agencies, and the relevant accrediting commissions, and in
certain cases, such as with our newly approved doctoral program
in education, involves a process that can take several years to
complete. The imposition of restrictions on the initiation of
new educational programs by any of our regulatory agencies, or
delays in obtaining approvals of such programs, may delay our
expansion plans. Establishing new academic programs or modifying
existing academic programs may also require us to make
investments in specialized personnel, increase marketing
efforts, and reallocate resources. We may have limited
experience with the subject matter of new programs.
If we are unable to expand our existing programs, offer new
programs on a timely basis or in a cost-effective manner, or
otherwise manage effectively the operations of newly established
programs, our business, prospects, financial condition, and
results of operations could be adversely affected.
Our
failure to keep pace with changing market needs and technology
could harm our ability to attract students.
Our success depends to a large extent on the willingness of
employers to employ, promote, or increase the pay of our
graduates. Increasingly, employers demand that their new
employees possess appropriate technical and analytical skills
and also appropriate interpersonal skills, such as
communication, and teamwork skills. These skills can evolve
rapidly in a changing economic and technological environment.
Accordingly, it is important that our educational programs
evolve in response to those economic and technological changes.
The expansion of existing academic programs and the development
of new programs may not be accepted by current or prospective
students or by the employers of our graduates. Even if we are
able to develop acceptable new programs, we may not be able to
begin offering those new programs in a timely fashion or as
quickly as our competitors offer similar programs. If we are
unable to adequately respond to changes in market requirements
due to regulatory or financial constraints, unusually rapid
technological changes, or other factors, the rates at which our
graduates obtain jobs in their fields of study could suffer, our
ability to attract and retain students could be impaired, and
our business, prospects, financial condition, and results of
operations could be adversely affected.
If we
do not maintain existing, and develop additional, relationships
with employers, our future growth may be impaired.
We currently have relationships with large school districts and
healthcare systems, primarily in Arizona, and also recently
began seeking relationships with national and international
employers, to provide their employees with the opportunity to
obtain degrees through us while continuing their employment.
These relationships are an important part of our strategy as
they provide us with a steady source of potential working adult
students for particular programs and also serve to increase our
reputation among high-profile employers. If we are unable to
develop new relationships, or if our existing relationships
deteriorate or end as a result of economic conditions affecting
employers or otherwise, our efforts to seek these sources of
potential working adult students will be impaired, and this
could materially and adversely affect our business, prospects,
financial condition, and results of operations.
Our
failure to effectively manage our growth could harm our
business.
Our business recently has experienced rapid growth. Growth and
expansion of our operations may place a significant strain on
our resources and increase demands on our executive management
team, management information and reporting systems, financial
management controls and personnel, and regulatory compliance
systems and personnel. We may not be able to maintain or
accelerate our current growth rate, effectively manage our
expanding operations, or achieve planned growth on a timely or
profitable basis. If we are unable to manage our growth
effectively, we may experience operating inefficiencies and our
earnings may be materially adversely affected.
25
Our
success depends upon our ability to recruit and retain key
personnel.
Our success to date has largely depended on, and will continue
to depend on, the skills, efforts, and motivation of our
executive officers, who generally have significant experience
with our company and within the education industry. Our success
also largely depends on our ability to attract and retain highly
qualified faculty, school administrators, and additional
corporate management personnel. We may have difficulties in
locating and hiring qualified personnel and in retaining such
personnel once hired. In addition, because we operate in a
highly competitive industry, our hiring of qualified executives
or other personnel may cause us or such persons to be subject to
lawsuits alleging misappropriation of trade secrets, improper
solicitation of employees, or other claims. Other than
non-compete
agreements of limited duration that we have with certain
executive officers, we have not historically sought non-compete
agreements with key personnel and they may leave and
subsequently compete against us. The loss of the services of any
of our key personnel, many of whom are not party to employment
agreements with us, or our failure to attract and retain other
qualified and experienced personnel on acceptable terms, could
cause our business to suffer.
The
protection of our operations through exclusive proprietary
rights and intellectual property is limited, and from time to
time we encounter disputes relating to our use of intellectual
property of third parties, any of which could harm our
operations and prospects.
In the ordinary course of our business we develop intellectual
property of many kinds that is or will be the subject of
copyright, trademark, service mark, patent, trade secret, or
other protections. This intellectual property includes but is
not limited to courseware materials and business know-how and
internal processes and procedures developed to respond to the
requirements of operating our business and to comply with the
rules and regulations of various education regulatory agencies.
We rely on a combination of copyrights, trademarks, service
marks, trade secrets, domain names, and agreements to protect
our intellectual property. We rely on service mark and trademark
protection in the United States to protect our rights to the
mark Grand Canyon University, as well as distinctive
logos and other marks associated with our services. We rely on
agreements under which we obtain rights to use course content
developed by faculty members and other third party content
experts, as well as license agreements pursuant to which we
license the right to brand certain of our program offerings. We
cannot assure you that the measures that we take will be
adequate or that we have secured, or will be able to secure,
appropriate protections for all of our proprietary rights in the
United States or select foreign jurisdictions, or that third
parties will not infringe upon or violate our proprietary
rights. Unauthorized third parties may attempt to duplicate or
copy the proprietary aspects of our curricula, online resource
material, and other content, and offer competing programs to
ours.
In particular, we license the right to utilize the name of Ken
Blanchard in connection with our business school and Executive
MBA programs and have spent significant resources in related
branding efforts. Nevertheless, our license agreement with
Blanchard Education, LLC has a fixed term and may not
necessarily be extended in the future. In addition, third
parties may attempt to develop competing programs or copy
aspects of our curriculum, online resource material, quality
management, and other proprietary content. The termination of
this license agreement, or attempts to compete with or duplicate
our programs, if successful, could adversely affect our
business. Protecting these types of intellectual property rights
can be difficult, particularly as it relates to the development
by our competitors of competing courses and programs.
We may from time to time encounter disputes over rights and
obligations concerning intellectual property, and we may not
prevail in these disputes. In certain instances, we may not have
obtained sufficient rights in the content of a course. Third
parties may raise a claim against us alleging an infringement or
violation of the intellectual property of that third party. Some
third-party intellectual property rights may be extremely broad,
and it may not be possible for us to conduct our operations in
such a way as to avoid those intellectual property rights. Any
such intellectual property claim could subject us to costly
litigation and impose a significant strain on our financial
resources and management personnel regardless of whether such
claim has merit, and we may be required to alter the content of
our classes or pay monetary damages, which may be significant.
26
We are
subject to laws and regulations as a result of our collection
and use of personal information, and any violations of such laws
or regulations, or any breach, theft, or loss of such
information, could adversely affect our reputation and
operations.
Possession and use of personal information in our operations
subjects us to risks and costs that could harm our business. We
collect, use, and retain large amounts of personal information
regarding our applicants, students, faculty, staff, and their
families, including social security numbers, tax return
information, personal and family financial data, and credit card
numbers. We also collect and maintain personal information of
our employees in the ordinary course of our business. Our
services can be accessed globally through the Internet.
Therefore, we may be subject to the application of national
privacy laws in countries outside the U.S. from which applicants
and students access our services. Such privacy laws could impose
conditions that limit the way we market and provide our services.
Our computer networks and the networks of certain of our vendors
that hold and manage confidential information on our behalf may
be vulnerable to unauthorized access, employee theft or misuse,
computer hackers, computer viruses, and other security threats.
Confidential information may also inadvertently become available
to third parties when we integrate systems or migrate data to
our servers following an acquisition of a school or in
connection with periodic hardware or software upgrades.
Due to the sensitive nature of the personal information stored
on our servers, our networks may be targeted by hackers seeking
to access this data. A user who circumvents security measures
could misappropriate sensitive information or cause
interruptions or malfunctions in our operations. Although we use
security and business controls to limit access and use of
personal information, a third party may be able to circumvent
those security and business controls, which could result in a
breach of student or employee privacy. In addition, errors in
the storage, use, or transmission of personal information could
result in a breach of privacy for current or prospective
students or employees. Possession and use of personal
information in our operations also subjects us to legislative
and regulatory burdens that could require notification of data
breaches and restrict our use of personal information, and a
violation of any laws or regulations relating to the collection
or use of personal information could result in the imposition of
fines against us. As a result, we may be required to expend
significant resources to protect against the threat of these
security breaches or to alleviate problems caused by these
breaches. A major breach, theft, or loss of personal information
regarding our students and their families or our employees that
is held by us or our vendors, or a violation of laws or
regulations relating to the same, could have a material adverse
effect on our reputation and result in further regulation and
oversight by federal and state authorities and increased costs
of compliance.
We
operate in a highly competitive market with rapid technological
change, and we may not have the resources needed to compete
successfully.
Online education is a highly competitive market that is
characterized by rapid changes in students technological
requirements and expectations and evolving market standards. Our
competitors vary in size and organization, and we compete for
students with traditional public and private two-year and
four-year colleges and universities and other for-profit
schools, including those that offer online learning programs.
Each of these competitors may develop platforms or other
technologies, including technologies such as streaming video,
that allow for greater levels of interactivity between faculty
and students, that are superior to the platform and technology
we use, and these differences may affect our ability to recruit
and retain students. We may not have the resources necessary to
acquire or compete with technologies being developed by our
competitors, which may render our online delivery format less
competitive or obsolete.
At
present we derive a significant portion of our revenues and
operating income from our graduate programs.
As of September 30, 2008, approximately 56% of our students
were graduate students. Although we anticipate that this
percentage will decline over time due as a result of our planned
growth emphasis in our undergraduate business and liberal arts
programs, if we were to experience any event that adversely
affected our graduate offerings or the attractiveness of our
programs to prospective graduate students, our business,
prospects, financial condition, and results of operations could
be significantly and adversely affected.
27
We may
incur liability for the unauthorized duplication or distribution
of class materials posted online for class
discussions.
In some instances, our faculty members or our students may post
various articles or other third-party content on class
discussion boards. Third parties may raise claims against us for
the unauthorized duplication of material posted online for class
discussions. Any such claims could subject us to costly
litigation and impose a significant strain on our financial
resources and management personnel regardless of whether the
claims have merit. Our general liability insurance may not cover
potential claims of this type adequately or at all, and we may
be required to alter the content of our courses or pay monetary
damages, which may be significant.
We use
third-party software for our online classroom, and if the
provider of that software were to cease to do business or was
acquired by a competitor, we may have difficulty maintaining the
software required for our online classroom or updating it for
future technological changes, which could adversely affect our
performance.
Our online classroom employs the ANGEL Learning Management Suite
pursuant to a license from ANGEL Learning, Inc. The ANGEL system
is a web-based portal that stores, manages, and delivers course
content; enables assignment uploading; provides interactive
communication between students and faculty; and supplies online
evaluation tools. We rely on ANGEL Learning, Inc. for
administrative support of the ANGEL system and, if ANGEL
Learning, Inc. ceased to operate or was unable or unwilling to
continue to provide us with services or upgrades on a timely
basis, we may have difficulty maintaining the software required
for our online classroom or updating it for future technological
changes. Any failure to maintain our online classroom would have
an adverse impact on our operations, damage our reputation, and
limit our ability to attract and retain students.
Seasonal
and other fluctuations in our results of operations could
adversely affect the trading price of our common
stock.
Our net revenue and operating results normally fluctuate as a
result of seasonal variations in our business, principally due
to changes in enrollment, and are typically lowest in our second
fiscal quarter and highest in our fourth fiscal quarter.
Accordingly, our results in any quarter may not indicate the
results we may achieve in any subsequent quarter or for the full
year. Student population varies as a result of new enrollments,
graduations, and student attrition. A significant portion of our
general and administrative expenses do not vary proportionately
with fluctuations in revenues. We expect quarterly fluctuations
in operating results to continue as a result of seasonal
enrollment patterns. Such patterns may change, however, as a
result of new program introductions, the timing of colloquia and
events, and increased enrollments of students. These
fluctuations may result in volatility or have an adverse effect
on the market price of our common stock.
We
only recently began operating as a for-profit company and have a
limited operating history as a
for-profit
company. Accordingly, our historical and recent financial and
business results may not necessarily be representative of what
they will be in the future.
We have only operated as a for-profit company with private
ownership interests since February 2004. We have a limited
operating history as a for-profit business on which you can
evaluate our management decisions, business strategy, and
financial results. Moreover, until October 2006, we operated
under various Department of Education limitations on our growth
and activities. As a result, our historical and recent financial
and business results may not necessarily be representative of
what they will be in the future. We are subject to risks,
uncertainties, expenses, and difficulties associated with
changing and implementing our business strategy that are not
typically encountered by established for-profit companies. As a
result, we may not be able to operate effectively as a
for-profit corporation. It is possible that we may incur
significant operating losses in the future and that we may not
be able to achieve or sustain long-term profitability.
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Our
current success and future growth depend on the continued
acceptance of the Internet and the corresponding growth in users
seeking educational services on the Internet.
Our business relies in part on the Internet for its success. A
number of factors could inhibit the continued acceptance of the
Internet and adversely affect our profitability, including:
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inadequate Internet infrastructure;
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security and privacy concerns;
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the unavailability of cost-effective Internet service and other
technological factors; and
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changes in government regulation of Internet use.
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If Internet use decreases, or if the number of Internet users
seeking educational services on the Internet does not increase,
our business may not grow as planned.
Government
regulations relating to the Internet could increase our cost of
doing business, affect our ability to grow or otherwise have a
material adverse effect on our business.
The increasing popularity and use of the Internet and other
online services has led and may lead to the adoption of new laws
and regulatory practices in the United States or foreign
countries and to new interpretations of existing laws and
regulations. These new laws and interpretations may relate to
issues such as online privacy, copyrights, trademarks and
service marks, sales taxes, fair business practices, and the
requirement that online education institutions qualify to do
business as foreign corporations or be licensed in one or more
jurisdictions where they have no physical location or other
presence. New laws and regulations or interpretations thereof
related to doing business over the Internet could increase our
costs and materially and adversely affect our business,
prospects, financial condition, and results of operations.
A
reclassification of our online faculty by federal or state
authorities from independent contractor to employee status could
materially increase our costs.
A majority of our faculty at September 30, 2008 were online
faculty, whom we treat as independent contractors. Because we
classify our online faculty as independent contractors, we do
not withhold federal or state income or other employment-related
taxes, make federal or state unemployment tax or Federal
Insurance Contributions Act, or FICA, payments or provide
workers compensation insurance with respect to our online
faculty. The determination of whether online faculty members are
properly classified as independent contractors or as employees
is based upon the facts and circumstances of our relationship
with our online faculty members. Federal or state authorities
may challenge our classification as incorrect and assert that
our online faculty members must be classified as employees. In
the event that we were to reclassify our online faculty as
employees, we would be required to withhold the appropriate
taxes, make unemployment tax and FICA payments, and pay for
workers compensation insurance and additional payroll
processing costs. If we had reclassified our online faculty
members as employees for 2007, we estimate our additional tax,
workers compensation insurance, and payroll processing
payments would have been approximately $1.2 million for
that year. The amount of additional tax and insurance payments
would increase in the future as the total amount we pay to
online faculty increases. In addition to these known costs, we
could be subject to retroactive taxes and penalties, which may
be significant, by federal and state authorities, which could
adversely affect our business, prospects, financial condition,
and results of operations.
We may
incur significant costs complying with the Americans with
Disabilities Act and similar laws.
Under the Americans with Disabilities Act of 1990, or the ADA,
all public accommodations must meet federal requirements related
to access and use by disabled persons. Additional federal,
state, and local laws also may require modifications to our
properties, or restrict our ability to renovate our properties.
For example, the Fair Housing Amendments Act of 1988, or FHAA,
requires apartment properties first occupied after
March 13, 1990 to be accessible to the handicapped. We have
not conducted an audit or investigation of all of our properties
to determine our compliance with present requirements.
Noncompliance with the ADA or FHAA could result in the
imposition of fines or an award or damages to private litigants
and also could result in an order to correct any non-complying
feature. We cannot predict the ultimate amount of the cost of
29
compliance with the ADA, FHAA, or other legislation. If we incur
substantial costs to comply with the ADA, FHAA, or any other
legislation, we could be materially and adversely affected.
Our
failure to comply with environmental laws and regulations
governing our activities could result in financial penalties and
other costs.
We use hazardous materials at our ground campus and generate
small quantities of waste, such as used oil, antifreeze, paint,
car batteries, and laboratory materials. As a result, we are
subject to a variety of environmental laws and regulations
governing, among other things, the use, storage, and disposal of
solid and hazardous substances and waste, and the
clean-up of
contamination at our facilities or off-site locations to which
we send or have sent waste for disposal. In the event we do not
maintain compliance with any of these laws and regulations, or
are responsible for a spill or release of hazardous materials,
we could incur significant costs for
clean-up,
damages, and fines, or penalties which could adversely impact
our business, prospects, financial condition, and results of
operations.
If we
expand in the future into new markets outside the United States,
we would be subject to risks inherent in non-domestic
operations.
If we acquire schools or establish programs in new markets
outside the United States, we will face risks that are inherent
in non-domestic operations, including the complexity of
operations across borders, new regulatory regimes, currency
exchange rate fluctuations, monetary policy risks, such as
inflation, hyperinflation and deflation, and potential political
and economic instability in the countries into which we expand.
Our
failure to obtain additional capital in the future could
adversely affect our ability to grow.
We believe that the proceeds from this offering being retained
by us, funds from operations, cash, and investments will be
adequate to fund our current operating and growth plans for the
foreseeable future. However, we may need additional financing in
order to finance our continued growth, particularly if we pursue
any acquisitions. The amount, timing, and terms of such
additional financing will vary principally depending on the
timing and size of new program offerings, the timing and size of
acquisitions we may seek to consummate, and the amount of cash
flows from our operations. To the extent that we require
additional financing in the future, such financing may not be
available on terms acceptable to us or at all, and,
consequently, we may not be able to fully implement our growth
strategy.
If we
are not able to integrate acquired schools, our business could
be harmed.
From time to time, we may pursue acquisitions of other schools.
Integrating acquired operations into our institution involves
significant risks and uncertainties, including:
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inability to maintain uniform standards, controls, policies, and
procedures;
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distraction of managements attention from normal business
operations during the integration process;
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inability to obtain, or delay in obtaining, approval of the
acquisition from the necessary regulatory agencies, or the
imposition of operating restrictions or a letter of credit
requirement on us or on the acquired school by any of those
regulatory agencies;
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expenses associated with the integration efforts; and
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unidentified issues not discovered in our due diligence process,
including legal contingencies.
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If we complete one or more acquisitions and are unable to
integrate acquired operations successfully, our business could
suffer.
Risks
Related to the Offering
There
is no existing market for our common stock, and we do not know
if one will develop to provide you with adequate
liquidity.
Immediately prior to this offering, there has been no public
market for our common stock. An active and liquid public market
for our common stock may not develop or be sustained after this
offering. The price of our common stock in any such market may
be higher or lower than the price you pay. If you purchase
shares
30
of common stock in this offering, you will pay a price that was
not established in a competitive market. Rather, you will pay
the price that we negotiated with the representatives of the
underwriters and such price may not be indicative of prices that
will prevail in the open market following this offering.
The
price of our common stock may fluctuate significantly, and you
could lose all or part of your investment.
Volatility in the market price of our common stock may prevent
you from being able to sell your shares at or above the price
you paid for your shares. The market price of our common stock
could fluctuate significantly for various reasons, which include:
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our quarterly or annual earnings or earnings of other companies
in our industry;
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the publics reaction to our press releases, our other
public announcements, and our filings with the SEC;
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changes in earnings estimates or recommendations by research
analysts who track our common stock or the stocks of other
companies in our industry;
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changes in our number of enrolled students;
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new laws or regulations or new interpretations of laws or
regulations applicable to our business;
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seasonal variations in our student population;
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the availability and cost of Title IV funds, other student
financial aid, and private loans;
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the failure to maintain or keep in good standing our regulatory
approvals and accreditations;
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changes in accounting standards, policies, guidance,
interpretations, or principles;
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changes in general conditions in the U.S. and global
economies or financial markets, including those resulting from
war, incidents of terrorism, or responses to such events;
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an adverse economic or other development that affects job
prospects in our core disciplines;
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litigation involving our company, or investigations or audits by
regulators into the operations of our company or our
competitors, including the investigation of Grand Canyon
University currently being conducted by the Office of Inspector
General of the Department of Education, and the pending qui
tam action regarding the manner in which we have compensated
our enrollment personnel; and
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sales of common stock by our directors, executive officers, and
significant stockholders.
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In addition, in recent years, the stock market has experienced
extreme price and volume fluctuations. This volatility has had a
significant impact on the market price of securities issued by
many companies, including companies in our industry. The changes
frequently appear to occur without regard to the operating
performance of these companies. The price of our common stock
could fluctuate based upon factors that have little or nothing
to do with our company, and these fluctuations could materially
reduce our stock price.
Our
executive officers, directors, and principal existing
stockholders will continue to own a large percentage of our
voting stock after this offering, which may allow them to
collectively control substantially all matters requiring
stockholder approval and, in the case of certain of our
principal stockholders, will have other unique rights that may
afford them access to our management.
Our directors, executive officers, and principal existing
stockholders will beneficially own approximately
31,300,615 shares, or 71.7%, of our common stock upon the
completion of this offering. Our directors and executive
officers will beneficially own in the aggregate approximately
29,465,485 shares, or 67.5%, of our common stock after the
offering. In addition, pursuant to a voting agreement entered
into among Brent Richardson, Chris Richardson, and certain of
our existing stockholders, the Richardsons will have voting
control over approximately 44.5% or our common stock effective
upon completion of the offering. See Certain Relationships
and Related Transactions Voting Agreement.
Accordingly, the Richardsons could significantly influence the
outcome of any actions requiring the vote or consent of
stockholders, including elections of directors, amendments to
our certificate of incorporation and bylaws, mergers, going
private transactions, and other extraordinary transactions, and
any decisions concerning the terms of any of these
31
transactions. The ownership and voting positions of these
stockholders may have the effect of delaying, deterring, or
preventing a change in control or a change in the composition of
our board of directors. These stockholders may also use their
contractual rights, including access to management, and their
large ownership position to address their own interests, which
may be different from those of our other stockholders, including
investors in this offering.
Your
percentage ownership in us may be diluted by future issuances of
capital stock, which could reduce your influence over matters on
which stockholders vote.
Following the completion of this offering, our board of
directors has the authority, without action or vote of our
stockholders, to issue all or any part of our authorized but
unissued shares of common stock, including shares issuable upon
the exercise of options, shares that may be issued to satisfy
our payment obligations under our incentive plans, or shares of
our authorized but unissued preferred stock. Issuances of common
stock or voting preferred stock would reduce your influence over
matters on which our stockholders vote, and, in the case of
issuances of preferred stock, likely would result in your
interest in us being subject to the prior rights of holders of
that preferred stock.
The
sale of a substantial number of shares of our common stock after
this offering may cause the market price of shares of our common
stock to decline.
Sales of our common stock by existing investors may begin
shortly after the completion of this offering. Sales of a
substantial number of shares of our common stock in the public
market following this offering, or the perception that these
sales could occur, could cause the market price of our common
stock to decline. The shares of our common stock outstanding
prior to this offering will be eligible for sale in the public
market at various times in the future. All of our directors,
executive officers, and stockholders agreed with the
underwriters, subject to certain exceptions, not to dispose of
or hedge any of their common stock or securities convertible
into or exchangeable for shares of common stock until
180 days after the date of this prospectus, except with the
prior written consent of the representatives identified in the
section of this prospectus entitled Underwriting.
Upon expiration of this
lock-up
period, up to approximately 33,059,714 additional shares of
common stock may be eligible for sale in the public market
without restriction, and up to approximately
27,370,832 shares of common stock held by affiliates may
become eligible for sale, subject to the restrictions under
Rule 144 of the Securities Act of 1933, as amended, or the
Securities Act.
You
will incur immediate and substantial dilution in the net
tangible book value of your shares.
If you purchase shares in this offering, the value of your
shares based on our actual book value will immediately be less
than the price you paid. This reduction in the value of your
equity is known as dilution. This dilution occurs in large part
because our earlier investors paid substantially less than the
initial public offering price when they purchased their shares
of our common stock. Based upon the issuance and sale of
10,500,000 shares of our common stock by us in this
offering at an assumed initial public offering price of $13.00
per share, the midpoint of the price range set forth on the
cover page of this prospectus, you will incur immediate dilution
of $12.05 in the net tangible book value per share. A $1.00
increase or decrease in the assumed initial public offering
price of $13.00 per share would increase or decrease, as
applicable, our pro forma as-adjusted net tangible book value
per share of common stock by $0.04, and increase or decrease, as
applicable, the dilution per share of common stock to new
investors by $0.96, assuming the number of shares offered by us,
as set forth on the cover page of this prospectus, remains the
same, after deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by us and
after payment of the special distribution to our existing
stockholders. If the underwriters exercise their over-allotment
option, or if outstanding options to purchase our common stock
are exercised, investors will experience additional dilution.
For more information, see Dilution.
Provisions
in our charter documents and the Delaware General Corporation
Law could make it more difficult for a third party to acquire us
and could discourage a takeover and adversely affect existing
stockholders.
Anti-takeover provisions of our certificate of incorporation,
bylaws, the Delaware General Corporation Law, or DGCL, and
regulations of state and federal education agencies could
diminish the opportunity for
32
stockholders to participate in acquisition proposals at a price
above the then-current market price of our common stock. For
example, while we have no present plans to issue any preferred
stock, our board of directors, without further stockholder
approval, may issue shares of undesignated preferred stock and
fix the powers, preferences, rights, and limitations of such
class or series, which could adversely affect the voting power
of your shares. In addition, our bylaws provide for an advance
notice procedure for nomination of candidates to our board of
directors that could have the effect of delaying, deterring, or
preventing a change in control. Further, as a Delaware
corporation, we are subject to provisions of the DGCL regarding
business combinations, which can deter attempted
takeovers in certain situations. The approval requirements of
the Department of Education, our regional accrediting
commission, and state education agencies for a change in control
transaction could also delay, deter, or prevent a transaction
that would result in a change in control. We may, in the future,
consider adopting additional anti-takeover measures. The
authority of our board to issue undesignated preferred or other
capital stock and the anti-takeover provisions of the DGCL, as
well as other current and any future anti-takeover measures
adopted by us, may, in certain circumstances, delay, deter, or
prevent takeover attempts and other changes in control of the
company not approved by our board of directors. See
Description of Capital Stock for further information.
We
currently do not intend to pay dividends on our common stock
and, consequently, your only opportunity to achieve a return on
your investment is if the price of our common stock
appreciates.
After we make the special distribution to our existing
stockholders using the proceeds of this offering as described
under Use of Proceeds, we do not expect to pay
dividends on shares of our common stock in the foreseeable
future and intend to use cash to grow our business. The payment
of cash dividends in the future, if any, will be at the
discretion of our board of directors and will depend upon such
factors as earnings levels, capital requirements, our overall
financial condition, and any other factors deemed relevant by
our board of directors. Consequently, your only opportunity to
achieve a positive return on your investment in us will be if
the market price of our common stock appreciates.
We
will have broad discretion in applying the net proceeds of this
offering and may not use those proceeds in ways that will
enhance the market value of our common stock.
We have significant flexibility in applying the net proceeds we
will receive in this offering. We will use a substantial portion
of the proceeds that we receive from the sale of stock in this
offering to fund the special distribution payable to our
existing stockholders and will use the remainder to pay the
expenses of this offering and for general corporate purposes. As
part of your investment decision, you will not be able to assess
or direct how we apply these net proceeds. If we do not apply
these funds effectively, we may lose significant business
opportunities. Furthermore, our stock price could decline if the
market does not view our use of the net proceeds from this
offering favorably.
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FORWARD-LOOKING
STATEMENTS
This prospectus contains forward-looking statements,
which include information relating to future events, future
financial performance, strategies, expectations, competitive
environment, regulation, and availability of resources. These
forward-looking statements include, without limitation,
statements regarding: proposed new programs; expectations that
regulatory developments or other matters will not have a
material adverse effect on our financial position, results of
operations, or liquidity; statements concerning projections,
predictions, expectations, estimates, or forecasts as to our
business, financial and operational results, and future economic
performance; and statements of managements goals and
objectives and other similar expressions concerning matters that
are not historical facts. Words such as may,
should, could, would,
predicts, potential,
continue, expects,
anticipates, future,
intends, plans, believes,
estimates and similar expressions, as well as
statements in future tense, identify forward-looking statements.
Forward-looking statements should not be read as a guarantee of
future performance or results, and will not necessarily be
accurate indications of the times at, or by, which such
performance or results will be achieved. Forward-looking
statements are based on information available at the time those
statements are made or managements good faith belief as of
that time with respect to future events, and are subject to
risks and uncertainties that could cause actual performance or
results to differ materially from those expressed in or
suggested by the forward-looking statements. Important factors
that could cause such differences include, but are not limited
to:
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our failure to comply with the extensive regulatory framework
applicable to our industry, including Title IV of the
Higher Education Act and the regulations thereunder, state laws
and regulatory requirements, and accrediting commission
requirements;
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the results of the ongoing investigation by the Department of
Educations Office of Inspector General and the pending
qui tam action regarding the manner in which we have
compensated our enrollment personnel, and possible remedial
actions or other liability resulting therefrom;
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the ability of our students to obtain federal Title IV
funds, state financial aid, and private financing;
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risks associated with changes in applicable federal and state
laws and regulations and accrediting commission standards;
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our ability to hire and train new, and develop and train
existing, enrollment counselors;
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the pace of growth of our enrollment;
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our ability to convert prospective students to enrolled students
and to retain active students;
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our success in updating and expanding the content of existing
programs and developing new programs in a cost-effective manner
or on a timely basis;
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industry competition, including competition for qualified
executives and other personnel;
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risks associated with the competitive environment for marketing
our programs;
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failure on our part to keep up with advances in technology that
could enhance the online experience for our students;
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our ability to manage future growth effectively;
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general adverse economic conditions or other developments that
affect job prospects in our core disciplines; and
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other factors discussed under the headings Risk
Factors, Managements Discussion and Analysis
of Financial Condition and Results of Operations,
Business, and Regulation.
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Forward-looking statements speak only as of the date the
statements are made. You should not put undue reliance on any
forward-looking statements. We assume no obligation to update
forward-looking statements to reflect actual results, changes in
assumptions, or changes in other factors affecting
forward-looking information, except to the extent required by
applicable securities laws. If we do update one or more
forward-looking
statements, no inference should be drawn that we will make
additional updates with respect to those or other
forward-looking statements.
34
USE OF
PROCEEDS
The net proceeds from the sale of 10,500,000 shares of our
common stock offered by us in this offering will be
approximately $120.8 million (or approximately
$139.9 million if the underwriters exercise their
over-allotment
option in full), assuming an initial public offering price of
$13.00 per share, which is the midpoint of the range set forth
on the cover page of this prospectus, and after deducting the
underwriting discounts and commissions and estimated offering
expenses payable by us.
We will pay a special distribution of 75% of the gross proceeds
of this offering, including any proceeds we receive from the
underwriters exercise of their over-allotment option, that
will be payable promptly upon the completion of this offering
(and following the exercise of the
over-allotment
option, if applicable) to our stockholders of record as of
November 18, 2008. We will make this distribution upon
completion of the offering. See Special Distribution
for further information.
We will use the remaining proceeds that we receive from this
offering and from the underwriters exercise of their
over-allotment option to pay the expenses of this offering and
for general corporate purposes.
Each $1.00 increase or decrease in the assumed public offering
price of $13.00 per share would increase or decrease, as
applicable, the aggregate amount of the special distribution by
$7.9 million, the per share amount of the special
distribution by $0.24 on an as-if converted basis and the net
proceeds to us by approximately $1.9 million, assuming the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same and, with respect to the
net proceeds to us, after deducting estimated underwriting
discounts and commissions and the special distribution noted
above. Similarly, any increase or decrease in the number of
shares that we sell in the offering will increase or decrease
the special distribution and our net proceeds in proportion to
such increase or decrease, as applicable, multiplied by the
offering price per share, with respect to our net proceeds, less
underwriting discounts and commissions.
35
SPECIAL
DISTRIBUTION
We will pay a special distribution of 75% of the gross proceeds
of this offering, including any proceeds we receive from the
underwriters exercise of their over-allotment option, that
will be paid promptly upon the completion of this offering (and
following the exercise of the
over-allotment
option, if applicable) to our stockholders of record as of
November 18, 2008. Of the estimated aggregate amount of the
special distribution of $102.4 million (exclusive of any
amounts that may be received from the underwriters
exercise of the over-allotment option), assuming an initial
public offering price of $13.00 per share, which is the midpoint
of the price range set forth on the cover of this prospectus,
$54.3 million will be paid in respect of shares of our
capital stock over which our directors and executive officers
are deemed to exercise sole or shared voting or investment
power. These proceeds will be allocated among our directors and
executive officers, as well as persons known to us to own
beneficially 5% or more of our outstanding common stock, as set
forth in the following table.
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Date of Acquisition
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Original Acquisition
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of Shares to Which
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Cost of Shares to Which
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Amount of
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Special Distribution
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Special Distribution
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Special
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Name of Beneficial Owner
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Relates
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Relates(1)
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Distribution(2)
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(In thousands)
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5% Stockholders
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Endeavour Capital Fund IV, L.P. and
affiliates(3)
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Series A convertible preferred stock
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August 24, 2005
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$
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16,000
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$
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27,979
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Series C preferred stock
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December 18, 2007
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5,863
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2,793
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Total
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21,863
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30,772
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220 GCU, L.P. and
affiliates(4)
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Common stock
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February 2, 2004
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3,042
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14,544
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Series A convertible preferred stock
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August 24, 2005
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3,250
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5,683
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Series C preferred stock
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December 18, 2007
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3,271
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1,558
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Total
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9,563
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21,785
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Staci L.
Buse(5)
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Common stock
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February 2, 2004
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1,443
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10,773
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Series C preferred stock
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December 18, 2007
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934
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445
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Total
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2,377
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11,218
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Significant Ventures, LLC
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Common stock
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February 2, 2004
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36
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7,778
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Series C preferred stock
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December 18, 2007
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1,223
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583
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Total
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1,259
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8,361
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Directors
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Chad N.
Heath(3)
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Series A convertible preferred stock
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August 24, 2005
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16,000
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27,979
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Series C preferred stock
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December 18, 2007
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5,863
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2,793
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Total
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21,863
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30,772
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D. Mark
Dorman(3)
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Series A convertible preferred stock
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August 24, 2005
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16,000
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27,979
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Series C preferred stock
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December 18, 2007
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5,863
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2,793
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Total
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21,863
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30,772
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Executive Officers
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Brent D.
Richardson(5)
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Common stock
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February 2, 2004
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1,443
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10,773
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Series C preferred stock
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December 18, 2007
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934
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445
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Total
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2,377
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11,218
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John E.
Crowley(6)
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Common stock
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February 2, 2004
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164
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1,046
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Series C preferred stock
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December 18, 2007
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117
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56
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Total
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281
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1,102
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Christopher C.
Richardson(5)
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Common stock
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February 2, 2004
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1,443
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10,780
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Series C preferred stock
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December 18, 2007
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934
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445
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Total
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2,377
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11,225
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All directors and executive officers as a group
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$
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26,898
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$
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54,316
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36
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(1) |
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On August 24, 2005, we converted from a limited liability
company to a taxable corporation. The reported acquisition cost
of shares of common stock represents the value of the capital
contributions originally made to acquire the limited liability
company interests that were converted into common stock upon
such conversion plus capital contributions for which no
additional interests were issued, less capital distributions. |
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(2) |
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The special distribution is being paid in respect of our common
stock, Series A convertible preferred stock, and
Series C preferred stock, in each case on an as-converted
basis. Upon the closing of this offering, shares of the
Series A convertible preferred stock will convert into
shares of common stock on a 1,826-for-one basis and shares of
the Series C preferred stock will convert into shares of
common stock at a rate equal to their liquidation preference per
share divided by the initial public offering price per share,
which is estimated to be $13.00 per share, which is the
midpoint of the range set forth on the cover page of this
prospectus. |
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(3) |
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Represents shares held of record by Endeavour Capital
Fund IV, L.P., Endeavour Associates Fund IV, L.P., and
Endeavour Capital Parallel Fund IV, L.P., which we refer to
as the Endeavour Entities. Messrs. Chad N. Heath and D.
Mark Dorman, each of whom is a managing director of Endeavour
Capital IV, LLC, the general partner for each of the Endeavour
Entities, are members of our board of directors. |
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(4) |
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Represents shares held of record by 220 GCU, L.P., 220
Education, L.P., 220-SigEd, L.P., and SV One, L.P. |
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(5) |
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Represents shares held of record by Rich Crow Enterprises, LLC
and Masters Online, LLC, of which Brent Richardson, Chris
Richardson, and Staci Buse are members and, in each case, which
are attributable to, and beneficially owned by, Brent
Richardson, Chris Richardson, or Staci Buse, as applicable. |
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(6) |
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Represents shares held of record by Rich Crow Enterprises, LLC,
of which John Crowley is a member, which are attributable to,
and beneficially owned by, John Crowley. |
See Certain Relationships and Related
Transactions Special Distribution and
Beneficial Ownership of Common Stock for additional
information regarding the beneficiaries of the special
distribution and share ownership.
DIVIDEND
POLICY
Except as described under Special Distribution
above, we do not anticipate declaring or paying any cash
dividends on our common stock in the foreseeable future. The
payment of any dividends in the future will be at the discretion
of our board of directors and will depend upon our financial
condition, results of operations, earnings, capital
requirements, contractual restrictions, outstanding
indebtedness, and other factors deemed relevant by our board. As
a result, you will need to sell your shares of common stock to
realize a return on your investment, and you may not be able to
sell your shares at or above the price you paid for them.
37
CAPITALIZATION
The following table sets forth our capitalization as of
September 30, 2008:
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on an actual basis;
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on a pro forma basis, giving effect to:
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(i)
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the automatic conversion of all outstanding shares of Series A
convertible preferred stock into 10,870,178 shares of
common stock upon the closing of the offering; and
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(ii)
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the automatic conversion of all outstanding shares of Series C
preferred stock into 2,061,538 shares of common stock upon
the closing of the offering at a conversion rate equal to their
liquidation preference per share divided by the initial public
offering price per share, which is estimated to be $13.00 per
share, which is the midpoint of the range set forth on the cover
page of this prospectus; and
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(iii)
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the exercise in November 2008 of the warrant to purchase
909,348 shares of our common stock for $0.58 per share; and
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on a pro forma, as adjusted basis, giving effect to the pro
forma adjustments above, as well as:
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(i)
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our sale of 10,500,000 shares of our common stock in this
offering (at an assumed initial public offering price of $13.00
per share, which is the midpoint of the range set forth on the
cover page of this prospectus) and after deducting the
underwriting discounts and commissions and estimated offering
expenses payable by us; and
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(ii)
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the payment of a special distribution to our existing
stockholders of 75% of the gross proceeds from the sale of
common stock by us in this offering, including any proceeds we
receive from the underwriters exercise of their
over-allotment option, which will occur promptly upon the
consummation of this offering (and the closing of the exercise
of the over-allotment option, if applicable).
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38
You should read this table together with Use of
Proceeds, Managements Discussion and Analysis
of Financial Condition and Results of Operations,
Description of Capital Stock, and our financial
statements and related notes included elsewhere in this
prospectus.
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As of September 30, 2008
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Pro Forma,
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Actual
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Pro Forma
|
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as Adjusted
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(In thousands, except share data)
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Cash and cash
equivalents(1)
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$
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22,227
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|
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$
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22,753
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$
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43,904
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|
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Capital lease obligations
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30,775
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$
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30,775
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$
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30,775
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Other indebtedness
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1,814
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$
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1,814
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$
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1,814
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Series A convertible preferred stock: $0.01 par value;
9,700 shares authorized, 5,953 shares issued and
outstanding, actual; no shares authorized, issued, and
outstanding, pro forma and pro forma, as adjusted
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18,610
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Series B convertible preferred stock: $0.01 par value;
2,200 shares authorized, no shares issued and outstanding,
actual; no shares authorized, issued, and outstanding, pro forma
and pro forma, as adjusted
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Series C preferred stock: $0.01 par value;
3,900 shares authorized, 3,829 shares issued and
outstanding, actual; no shares authorized, issued, and
outstanding, pro forma and pro forma, as adjusted
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14,129
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Stockholders equity:
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Undesignated preferred stock: $0.01 par value;
no shares authorized, issued and outstanding, actual and
pro forma; 10,000,000 shares authorized, no shares issued
and outstanding, pro forma, as adjusted
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Common stock: $0.01 par value; 100,000,000 shares
authorized, 19,218,650 shares issued and outstanding,
actual; 100,000,000 shares authorized,
33,059,714 shares issued and outstanding, pro forma;
100,000,000 shares authorized, 43,559,714 shares
issued and outstanding pro forma, as adjusted
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|
192
|
|
|
|
331
|
|
|
|
436
|
|
Additional paid-in
capital(1)
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6,238
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|
|
|
39,364
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|
|
|
57,729
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Accumulated other comprehensive income
|
|
|
11
|
|
|
|
11
|
|
|
|
11
|
|
Accumulated deficit
|
|
|
(13,898
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)
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|
(13,898
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)
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(13,898
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)
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|
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|
|
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Total stockholders equity (deficit)
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(7,457
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)
|
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25,808
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|
|
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44,278
|
|
|
|
|
|
|
|
|
|
|
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Total capitalization
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$
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57,871
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|
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$
|
58,397
|
|
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$
|
76,867
|
|
|
|
|
|
|
|
|
|
|
|
|
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(1) |
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A $1.00 increase or decrease in the assumed initial public
offering price of $13.00 per share would increase or decrease
cash and cash equivalents by $1.9 million, would increase
or decrease additional paid-in capital by $1.9 million, and
would increase or decrease total stockholders equity and
total capitalization by $1.9 million, after deducting the
underwriting discount, and the payment of the special
distribution to our existing stockholders as described in
Special Distribution. Similarly, any increase or
decrease in the number of shares that we sell in the offering
will increase or decrease our net proceeds in proportion to such
increase or decrease, as applicable, multiplied by the offering
price per share, less underwriting discounts and commissions. |
39
DILUTION
Purchasers of the common stock in the offering will suffer an
immediate and substantial dilution in net tangible book value
per share. Dilution is the amount by which the initial public
offering price paid by purchasers of shares of our common stock
exceeds the net tangible book value per share of our common
stock after the offering.
As of September 30, 2008, our pro forma net tangible book
value would have been $22.9 million or, $0.69 per share.
Pro forma net tangible book value per share represents the
amount of our total tangible assets reduced by our total
liabilities, divided by the number of shares of common stock
outstanding after giving effect to the conversion of all
outstanding classes of preferred stock into common stock, and
the exercise in November 2008 of the warrant to purchase
909,348 shares of our common stock.
Pro forma as adjusted net tangible book value per share
represents the amount of total tangible assets reduced by our
total liabilities, divided by the number of shares of common
stock outstanding after giving effect to the conversion of all
outstanding classes of preferred stock into common stock, the
exercise in November 2008 of the warrant to purchase
909,348 shares of our common stock, the payment of the
estimated amount of the special distribution to certain of our
existing stockholders and the sale of 10,500,000 shares of
common stock in the offering at an initial public offering price
of $13.00 per share, the midpoint of the price range set forth
on the cover page of this prospectus. Our pro forma as adjusted
net tangible book value as of September 30, 2008 would have
been $41.3 million, or $0.95 per share. This represents an
immediate increase in net tangible book value of $0.26 per share
to existing stockholders and an immediate dilution of $12.05 per
share to new investors purchasing shares in the offering. The
following table illustrates this per share dilution:
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|
|
|
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|
|
Assumed initial public offering price per share of common stock
|
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|
|
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$
|
13.00
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value per share of common stock as
of
September 30, 2008
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$
|
0.69
|
|
|
|
|
|
Increase per share of common stock attributable to new investors
|
|
|
2.97
|
|
|
|
|
|
Decrease per share of common stock after payment of underwriting
discounts and commission and estimated offering expenses by us
|
|
|
(0.36
|
)
|
|
|
|
|
Decrease per share of common stock after payment of the special
distribution to certain of our existing stockholders
|
|
|
(2.35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma as adjusted net tangible book value per share of
common stock after this offering
|
|
|
|
|
|
|
0.95
|
|
|
|
|
|
|
|
|
|
|
Dilution per share of common stock to new investors
|
|
|
|
|
|
$
|
12.05
|
|
|
|
|
|
|
|
|
|
|
Our pro forma as adjusted net tangible book value will be
$45.0 million, or $1.00 per share, and the dilution per
share of common stock to new investors will be $12.00, if the
underwriters over-allotment option is exercised in full.
A $1.00 increase or decrease in the assumed initial public
offering price of $13.00 per share would increase or decrease,
as applicable, our as pro forma adjusted net tangible book value
per share of common stock by $0.04, and increase or decrease, as
applicable, the dilution per share of common stock to new
investors by $0.96, assuming the number of shares offered by us,
as set forth on the cover page of this prospectus, remains the
same, after deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by us.
Similarly, any increase or decrease in the number of shares that
we sell in the offering will increase or decrease our net
proceeds in proportion to such increase or decrease, as
applicable, multiplied by the offering price per share, less
underwriting discounts and commissions and offering expenses.
40
The following table sets forth, as of September 30, 2008,
on the pro forma as-adjusted basis described above, the
differences between existing stockholders, including the effect
of the exercise in November 2008 of the warrant to purchase
909,348 shares of our common stock, and new investors with
respect to the total number of shares of common stock purchased
from us, the total consideration paid, and the average price per
share paid before deducting underwriting discounts and
commissions and estimated offering expenses payable by us, at an
assumed initial public offering price of $13.00 per share of
common stock, which is the midpoint of the range set forth on
the cover page of this prospectus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Price Per
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Share
|
|
|
|
(Dollars in thousands)
|
|
|
Existing stockholders
|
|
|
33,059,714
|
|
|
|
75.9
|
%
|
|
$
|
40,827
|
|
|
|
23.0
|
%
|
|
$
|
1.23
|
|
New investors
|
|
|
10,500,000
|
|
|
|
24.1
|
%
|
|
|
136,500
|
|
|
|
77.0
|
%
|
|
$
|
13.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
43,559,714
|
|
|
|
100.0
|
%
|
|
$
|
177,327
|
|
|
|
100.0
|
%
|
|
$
|
4.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A $1.00 increase or decrease in the assumed initial public
offering price of $13.00 per share would increase or decrease,
as applicable, total consideration paid by new investors, total
consideration paid by all stockholders and average price per
share paid by all stockholders by $10.5 million,
$10.5 million, and $0.26, respectively, assuming the number
of shares offered by us, as set forth on the cover page of this
prospectus, remains the same. Similarly, any increase or
decrease in the number of shares that we sell in the offering
will increase or decrease our net proceeds in proportion to such
increase or decrease, as applicable, multiplied by the offering
price per share, less underwriting discounts and commissions.
This table does not give effect to the payment of the special
distribution to existing stockholders.
If the underwriters over-allotment option is exercised in
full, the number of shares held by existing stockholders after
this offering would be 33,059,714, or 73.2%, and the number of
shares held by new investors would increase to 12,075,000, or
26.8%, of the total number of shares of our common stock
outstanding after this offering.
41
SELECTED
FINANCIAL AND OTHER DATA
The following table sets forth selected financial and other data
as of the dates and for the periods indicated. The statement of
operations and other data, excluding period end enrollment, for
the years ended December 31, 2005, 2006, and 2007, and the
balance sheet data as of December 31, 2006 and 2007, have
been derived from our audited financial statements, which are
included elsewhere in this prospectus. The selected statement of
operations and other data for the period from February 2,
2004 (date of inception) through December 31, 2004, and the
selected balance sheet data as of December 31, 2004 and
2005 have been derived from our unaudited financial statements,
which are not included in this prospectus. The statement of
operations and other data, excluding period end enrollment, for
each of the nine month periods ended September 30, 2007 and
2008, and the balance sheet data as of September 30, 2008,
have been derived from our unaudited financial statements, which
are presented elsewhere in this prospectus and include, in the
opinion of management, all adjustments, consisting of normal,
recurring adjustments, necessary for a fair presentation of such
data. Our historical results are not necessarily indicative of
our results for any future period.
You should read the following selected financial and other data
in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our financial statements and related notes included
elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, 2004
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
to December 31,
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2004(2)
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Restated)(1)
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except enrollment and per share data)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
25,629
|
|
|
$
|
51,793
|
|
|
$
|
72,111
|
|
|
$
|
99,326
|
|
|
$
|
68,472
|
|
|
$
|
109,626
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
19,705
|
|
|
|
28,063
|
|
|
|
31,287
|
|
|
|
39,050
|
|
|
|
27,531
|
|
|
|
36,995
|
|
Selling and promotional
|
|
|
9,735
|
|
|
|
14,047
|
|
|
|
20,093
|
|
|
|
35,148
|
|
|
|
24,291
|
|
|
|
46,035
|
|
General and administrative
|
|
|
10,828
|
|
|
|
12,968
|
|
|
|
15,011
|
|
|
|
17,001
|
|
|
|
11,848
|
|
|
|
15,992
|
|
Royalty to former owner
|
|
|
448
|
|
|
|
1,619
|
|
|
|
2,678
|
|
|
|
3,782
|
|
|
|
2,585
|
|
|
|
1,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
40,716
|
|
|
|
56,697
|
|
|
|
69,069
|
|
|
|
94,981
|
|
|
|
66,255
|
|
|
|
100,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(15,087
|
)
|
|
|
(4,904
|
)
|
|
|
3,042
|
|
|
|
4,345
|
|
|
|
2,217
|
|
|
|
8,992
|
|
Interest expense
|
|
|
(1,135
|
)
|
|
|
(3,098
|
)
|
|
|
(2,827
|
)
|
|
|
(2,975
|
)
|
|
|
(2,236
|
)
|
|
|
(2,156
|
)
|
Interest income
|
|
|
10
|
|
|
|
276
|
|
|
|
912
|
|
|
|
1,172
|
|
|
|
887
|
|
|
|
508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(16,212
|
)
|
|
|
(7,726
|
)
|
|
|
1,127
|
|
|
|
2,542
|
|
|
|
868
|
|
|
|
7,344
|
|
Income tax expense
(benefit)(3)
|
|
|
|
|
|
|
(3,440
|
)
|
|
|
529
|
|
|
|
1,016
|
|
|
|
347
|
|
|
|
2,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(16,212
|
)
|
|
|
(4,286
|
)
|
|
|
598
|
|
|
|
1,526
|
|
|
|
521
|
|
|
|
4,476
|
|
Preferred dividends
|
|
|
|
|
|
|
|
|
|
|
(527
|
)
|
|
|
(349
|
)
|
|
|
(251
|
)
|
|
|
(791
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available (loss attributable) to common stockholders
|
|
$
|
(16,212
|
)
|
|
$
|
(4,286
|
)
|
|
$
|
71
|
|
|
$
|
1,177
|
|
|
$
|
270
|
|
|
$
|
3,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
N/A
|
|
|
$
|
(0.23
|
)
|
|
$
|
0.00
|
|
|
$
|
0.06
|
|
|
$
|
0.01
|
|
|
$
|
0.19
|
|
Diluted
|
|
|
N/A
|
|
|
$
|
(0.23
|
)
|
|
$
|
0.00
|
|
|
$
|
0.03
|
|
|
$
|
0.01
|
|
|
$
|
0.11
|
|
Shares used in computing earnings (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
N/A
|
|
|
|
18,470
|
|
|
|
18,853
|
|
|
|
18,923
|
|
|
|
18,885
|
|
|
|
19,133
|
|
Diluted
|
|
|
N/A
|
|
|
|
18,470
|
|
|
|
36,858
|
|
|
|
35,143
|
|
|
|
35,189
|
|
|
|
32,097
|
|
Pro forma earnings per common share
(Unaudited)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.03
|
|
|
|
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.03
|
|
|
|
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing pro forma earnings per common share
(Unaudited)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,321
|
|
|
|
|
|
|
|
40,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,015
|
|
|
|
|
|
|
|
41,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, 2004
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
to December 31,
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2004(2)
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Restated)(1)
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except enrollment and per share data)
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
24,376
|
|
|
$
|
817
|
|
|
$
|
2,387
|
|
|
$
|
7,406
|
|
|
$
|
5,136
|
|
|
$
|
6,015
|
|
Depreciation and amortization
|
|
$
|
1,136
|
|
|
$
|
1,879
|
|
|
$
|
2,396
|
|
|
$
|
3,300
|
|
|
$
|
2,319
|
|
|
$
|
3,676
|
|
Adjusted
EBITDA(5)
|
|
$
|
(13,503
|
)
|
|
$
|
(895
|
)
|
|
$
|
9,074
|
|
|
$
|
11,723
|
|
|
$
|
7,309
|
|
|
$
|
14,568
|
|
Period end enrollment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
|
|
|
3,141
|
|
|
|
6,212
|
|
|
|
8,406
|
|
|
|
12,497
|
|
|
|
11,306
|
|
|
|
19,287
|
|
Ground
|
|
|
1,852
|
|
|
|
2,210
|
|
|
|
2,256
|
|
|
|
2,257
|
|
|
|
2,193
|
|
|
|
2,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of September 30, 2008
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Actual
|
|
|
Pro
Forma(4)
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Restated)(1)
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,476
|
|
|
$
|
2,579
|
|
|
$
|
14,361
|
|
|
$
|
23,210
|
|
|
$
|
22,227
|
|
|
$
|
22,753
|
|
Total assets
|
|
|
30,892
|
|
|
|
51,859
|
|
|
|
61,232
|
|
|
|
88,568
|
|
|
|
105,618
|
|
|
|
106,144
|
|
Capital lease obligations (including short-term)
|
|
|
24,360
|
|
|
|
24,789
|
|
|
|
29,728
|
|
|
|
29,228
|
|
|
|
30,775
|
|
|
|
30,775
|
|
Other indebtedness (including short-term indebtedness)
|
|
|
4,511
|
|
|
|
2,635
|
|
|
|
2,462
|
|
|
|
2,408
|
|
|
|
1,814
|
|
|
|
1,814
|
|
Preferred stock
|
|
|
|
|
|
|
25,590
|
|
|
|
21,390
|
|
|
|
31,948
|
|
|
|
32,739
|
|
|
|
|
|
Total stockholders/members
deficit(2)(4)
|
|
|
(7,645
|
)
|
|
|
(12,111
|
)
|
|
|
(11,723
|
)
|
|
|
(10,386
|
)
|
|
|
(7,457
|
)
|
|
|
(76,567
|
)
|
|
|
|
(1) |
|
Our financial statements at December 31, 2006, and 2007 and
for each of the three years in the period ended
December 31, 2007 have been restated. See Note 3,
Restatement of Financial Statements, in our
financial statements that are included elsewhere in this
prospectus. |
|
(2) |
|
On February 2, 2004, we acquired the assets of Grand Canyon
University from a non-profit foundation and converted its
operations from non-profit to for-profit status. While the
university has continuously operated since 1949, for accounting
and financial statement reporting purposes, we treat the date of
acquisition and conversion to for-profit status as the date of
inception of our business. |
|
(3) |
|
On August 24, 2005, we converted from a limited liability
company to a taxable corporation. For all periods subsequent to
such date, we have been subject to corporate-level U.S.
federal and state income taxes. |
|
|
|
(4) |
|
As described in Use of Proceeds and Special
Distribution, we will use the proceeds of this offering to
pay a special distribution to our stockholders of record as of
November 18, 2008, in the amount of 75% of the gross
proceeds received by us from the sale of stock in this offering,
including any proceeds we receive from the underwriters
exercise of their over-allotment option, before underwriting
discounts and commissions and estimated offering expenses. Since
the special distribution represents distributions to existing
stockholders to be made from the proceeds of an initial public
offering, the pro forma balance sheet as of September 30,
2008 reflecting the distribution, but not giving effect to the
offering proceeds, is presented. In addition, since the amount
of the special distribution exceeds net income for the
twelve-month period ended September 30, 2008, pro forma
earnings per common share, basic and diluted, are presented for
the year ended December 31, 2007 and for the nine-month
period ended September 30, 2008, which amounts give effect
to the number of shares that would be required to be issued at
an assumed initial public offering price of $13.00 per
share to pay the amount of dividends that exceeds net income for
the twelve-month period ended September 30, 2008. The pro
forma balance sheet and earnings per common share data also
reflect the exercise of the warrant to purchase
909,348 shares of our common stock for $0.58 per share
and assume the conversion of all outstanding shares of
Series A convertible preferred stock into
10,870,178 shares of common stock upon the closing of the
offering and the conversion of all outstanding shares of
Series C preferred stock into 2,061,538 shares of
common stock |
43
|
|
|
|
|
upon the closing of the offering based on a conversion price
equal to $13.00 per share, which is the midpoint of the range
set forth on the cover page of this prospectus. |
|
|
|
(5) |
|
Adjusted EBITDA is defined as net income (loss) plus interest
expense net of interest income, plus income tax expense
(benefit), and plus depreciation and amortization (EBITDA), as
adjusted for (i) royalty payments incurred pursuant to an
agreement with our former owner that has been terminated as of
April 15, 2008, as discussed in Managements
Discussion and Analysis of Financial Condition and Results of
Operations Factors affecting
comparability Settlement with former owner and
Note 2 to our financial statements that are included
elsewhere in this prospectus, and (ii) management fees and
expenses that are no longer paid or that will no longer be
payable following completion of this offering. |
|
|
|
We present Adjusted EBITDA because we consider it to be an
important supplemental measure of our operating performance. We
also make certain compensation decisions based, in part, on our
operating performance, as measured by Adjusted EBITDA. See
Compensation Discussion and Analysis Impact of
Performance on Compensation. All of the adjustments made
in our calculation of Adjusted EBITDA are adjustments to items
that management does not consider to be reflective of our core
operating performance. Management considers our core operating
performance to be that which can be affected by our managers in
any particular period through their management of the resources
that affect our underlying revenue and profit generating
operations during that period. Management fees and expenses and
royalty expenses paid to our former owner are not considered
reflective of our core operating performance. |
|
|
|
Our management uses Adjusted EBITDA: |
|
|
|
|
|
in developing our internal budgets and strategic plan;
|
|
|
|
as a measurement of operating performance;
|
|
|
|
as a factor in evaluating the performance of our management for
compensation purposes; and
|
|
|
|
in presentations to the members of our board of directors to
enable our board to have the same measurement basis of operating
performance as are used by management to compare our current
operating results with corresponding prior periods and with the
results of other companies in our industry.
|
|
|
|
|
|
However, Adjusted EBITDA is not a recognized measurement under
GAAP, and when analyzing our operating performance, investors
should use Adjusted EBITDA in addition to, and not as an
alternative for, net income, operating income, or any other
performance measure presented in accordance with GAAP, or as an
alternative to cash flow from operating activities or as a
measure of our liquidity. Because not all companies use
identical calculations, our presentation of Adjusted EBITDA may
not be comparable to similarly titled measures of other
companies. Adjusted EBITDA has limitations as an analytical
tool, as discussed under Managements Discussion and
Analysis of Financial Condition and Results of
Operations Non-GAAP Discussion. |
44
|
|
|
|
|
The following table presents data relating to Adjusted EBITDA,
which is a non-GAAP measure, for the periods indicated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
Restated(1)
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Net income (loss)
|
|
$
|
(4,286
|
)
|
|
$
|
598
|
|
|
$
|
1,526
|
|
|
$
|
521
|
|
|
$
|
4,476
|
|
Plus: interest expense net of interest income
|
|
|
2,822
|
|
|
|
1,915
|
|
|
|
1,803
|
|
|
|
1,349
|
|
|
|
1,648
|
|
Plus: income tax expense (benefit)
|
|
|
(3,440
|
)
|
|
|
529
|
|
|
|
1,016
|
|
|
|
347
|
|
|
|
2,868
|
|
Plus: depreciation and amortization
|
|
|
1,879
|
|
|
|
2,396
|
|
|
|
3,300
|
|
|
|
2,319
|
|
|
|
3,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
(3,025
|
)
|
|
|
5,438
|
|
|
|
7,645
|
|
|
|
4,536
|
|
|
|
12,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus: royalty to former
owner(a)
|
|
|
1,619
|
|
|
|
2,678
|
|
|
|
3,782
|
|
|
|
2,585
|
|
|
|
1,612
|
|
Plus: management fees and
expenses(b)
|
|
|
511
|
|
|
|
958
|
|
|
|
296
|
|
|
|
188
|
|
|
|
288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(895
|
)
|
|
$
|
9,074
|
|
|
$
|
11,723
|
|
|
$
|
7,309
|
|
|
$
|
14,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Reflects the royalty fee arrangement with the former owner of
Grand Canyon University in which we agreed to pay a stated
percentage of cash revenue generated by our online programs. As
a result of the settlement of a dispute with the former owner,
we are no longer obligated to pay this royalty, although the
settlement includes a prepayment of future royalties that will
be amortized in 2008 and future periods. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Factors
affecting comparability Settlement with former
owner and Note 2 to our financial statements that are
included elsewhere in this prospectus.
|
|
|
|
|
(b)
|
Reflects management fees and expenses of $0.1 million,
$0.3 million, and $0.3 million for the years ended
December 31, 2005, 2006, and 2007, respectively, and
$0.2 million and $0.3 million for the nine month
periods ended September 30, 2007 and 2008, respectively, to
the general partner of Endeavour Capital, and an aggregate of
$0.4 million and $0.7 million for the years ended
December 31, 2005 and 2006, respectively, to an entity
affiliated with a former director and another affiliated with a
significant stockholder, in each case following their investment
in us. The agreements relating to these arrangements have all
terminated or will terminate by their terms upon the closing of
this offering. See Certain Relationships and Related
Transactions.
|
45
MANAGEMENTS
DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial
condition and results of operations should be read in
conjunction with our financial statements and related notes that
appear elsewhere in this prospectus. In addition to historical
financial information, the following discussion contains
forward-looking statements that reflect our plans, estimates and
beliefs. Our actual results could differ materially from those
discussed in the forward-looking statements. Factors that could
cause or contribute to these differences include those discussed
below and elsewhere in this prospectus, particularly in
Risk Factors and Forward-Looking
Statements.
Overview
General
We are a regionally accredited provider of online postsecondary
education services focused on offering graduate and
undergraduate degree programs in our core disciplines of
education, business, and healthcare. In addition to our online
programs, we offer ground programs at our traditional campus in
Phoenix, Arizona and onsite at the facilities of employers. At
September 30, 2008, we had approximately 22,000 students.
At December 31, 2007 we had approximately 14,800 students,
85% of whom were enrolled in our online programs, with 62%
pursuing masters degrees. Since we acquired Grand Canyon
University in February 2004, we have enhanced our senior
management team, expanded our online platform, increased our
program offerings, and initiated a marketing and branding effort
to further differentiate us in the markets in which we operate.
We have also made investments to enhance our student and
technology support services. We believe the changes we have
instituted, combined with our management expertise, provide a
platform that will support continued enrollment and revenue
growth.
In 2003, the Board of Trustees of the former owner initiated a
process to evaluate alternatives as a result of the
schools poor financial condition and, in February 2004,
several of our current stockholders acquired the assets of the
school and converted it to a for-profit institution. In May
2005, following this change in control, the Department of
Education recertified us to continue participating in the
Title IV programs on a provisional basis, subject to
certain restrictions and requirements, including requirements to
post a letter of credit, accept restrictions on the growth of
our program offerings and enrollment, and receive Title IV
funds under the heightened cash monitoring system of payment
(pursuant to which an institution is required to credit students
with Title IV funds prior to obtaining those funds from the
Department of Education). In October 2006, based on our
significantly improved financial condition and performance since
the change in control, the Department of Education eliminated
the letter of credit requirement and allowed the growth
restrictions to expire. In 2007, the Department of Education
eliminated the heightened cash monitoring restrictions and
returned us to the advance payment method (pursuant to which an
institution receives Title IV funds from the Department of
Education in advance of disbursement to students).
Regulatory
For our fiscal years ended December 31, 2006 and 2007, we
derived cash receipts equal to approximately 67.9% and 70.2%,
respectively, of our net revenue from tuition financed through
federal student financial aid programs authorized by Title IV of
the Higher Education Act. The following trends and uncertainties
may affect the availability of or our participation in the Title
IV programs.
During 2007 and 2008, student loan programs, including
the Title IV programs, have come under increased scrutiny by the
Department of Education, Congress, state attorneys general, and
other parties, including with respect to lending practices
related to such programs and potential conflicts of interest
between educational institutions and their lenders. The Attorney
General of the State of Arizona requested extensive
documentation and information from us and other institutions in
Arizona concerning student loan practices, and we provided
testimony in response to a subpoena from the Attorney General of
the State of Arizona about such practices. We have agreed with
the Attorney General of the State of Arizona to conclude this
matter by executing a Letter of Assurance, whereby we will agree
to conduct referrals of students to lenders in accordance with
our existing policies or any new policies promulgated by the
State of Arizona in the future, and by reimbursing the state for
the costs of its investigation in the amount of approximately
$20,000. As a result of this nationwide scrutiny, Congress has
passed new laws, the Department of Education has enacted
46
stricter regulations, and several states have adopted codes of
conduct or enacted state laws that further regulate the conduct
of lenders, schools, and school personnel. The effect of such
actions may be to increase the cost of participating in the
Title IV programs and other student loan programs, although we
are unable to calculate such potential costs at this time.
In addition, the recent disruption in the credit markets and
adverse market conditions for consumer loans in general have
affected the student lending marketplace, causing some lenders
to cease providing Title IV loans to students and causing others
to reduce the benefits and increase the fees for the Title IV
loans they provide. While some of the lenders we regularly
engage with have announced decisions to stop participating in
the Title IV loan market generally, to date there have been no
material disruptions in the availability of Title IV loans to
our students. We have been approved by the Department of
Education to participate in the Federal Direct Loan Program,
under which the Department of Education rather than a private
lender makes the loans to students, and we are prepared for our
students to begin receiving loans under that program if we
determine that such lending is necessary to continue our
students access to Title IV loans. The conditions in
the market, including the effect of recent legislation aimed at
broadening access to Title IV loans, are continuing to
evolve and the ultimate impact of such market conditions on our
business, if any, cannot be predicted. See
Regulation Regulation of Federal Student
Financial Aid Programs.
Also, in recent years, several for-profit education companies
have been faced with whistleblower lawsuits, known as
qui tam cases, brought by current or former
employees alleging that their institution had made impermissible
incentive payments to admissions employees. The employees
bringing such lawsuits typically seek, for themselves and for
the federal government, substantial financial penalties against
the subject company. In this regard, on September 11, 2008,
we were served with a qui tam lawsuit that had been filed
against us in August 2007 in the United States District Court
for the District of Arizona by a then-current employee on behalf
of the federal government. All proceedings in the lawsuit had
been under seal until September 5, 2008, when the court
unsealed the first amended complaint, which had been filed on
August 11, 2008. The lawsuit alleges, among other things,
that we have improperly compensated certain of our enrollment
counselors in violation of the Title IV law governing
compensation of such employees, and as a result, improperly
received Title IV program funds. See Risk
Factors We were recently notified that a qui
tam lawsuit has been filed against us alleging, among other
things, that we have improperly compensated certain of our
enrollment counselors, and we may incur liability, be subject to
sanctions, or experience damage to our reputation as a result of
this lawsuit, Business Legal
Proceedings, and Regulation Regulation
of Federal Student Financial Aid Programs Incentive
compensation rule. Further, on August 14, 2008, the
Office of Inspector General of the Department of Education
served an administrative subpoena on Grand Canyon University
requiring us to provide certain records and information related
to performance reviews and salary adjustments for all of our
enrollment counselors and managers from January 1, 2004 to
the present. See Risk Factors The Office of
Inspector General of the Department of Education has commenced
an investigation of Grand Canyon University, which is ongoing
and which may result in fines, penalties, other sanctions, and
damage to our reputation in the industry, and
Regulation Regulation of Federal Student
Financial Aid Programs Incentive compensation
rule. If it were determined that any of our compensation
practices violated the incentive compensation law, we could be
subject to substantial monetary liabilities, fines, and other
sanctions or could suffer an adverse outcome in the qui tam
litigation, any of which could have a material adverse
effect on our business, prospects, financial condition and
results of operations and could adversely affect our stock price.
Key
financial metrics
Net
revenue
Net revenue consists principally of tuition, room and board
charges attributable to students residing on our ground campus,
application and graduation fees, and commissions we earn from
bookstore and publication sales, less scholarships. Factors
affecting our net revenue include: (i) the number of
students who are enrolled and who remain enrolled in our
courses; (ii) the number of credit hours per student;
(iii) our degree and program mix; (iv) changes in our
tuition rates; (v) the amount of the scholarships that we
offer; (vi) the number of students housed in, and the rent
charged for, our on-campus student apartments and dormitories;
and (vii) the number of students who purchase books from
our bookstore.
47
We define enrollments for a particular time period as the number
of students registered in a course on the last day of classes
for each program within that financial reporting period. We
offer three 16-week semesters in a calendar year, with two
starts available per semester for our online students and for
students who typically take evening courses on-campus or onsite
at the facilities of their employer, whom we refer to as
professional studies ground students, and one start available
per semester for our traditional ground students. Enrollments
are a function of the number of continuing students at the
beginning of each period and new enrollments during the period,
which are offset by graduations, withdrawals, and inactive
students during the period. Inactive students for a particular
period include students who are not registered in a class and,
therefore, are not generating net revenue for that period, but
who have not withdrawn from Grand Canyon University.
We believe that the principal factors that affect our
enrollments and net revenue are the number and breadth of the
programs we offer; the attractiveness of our program offerings
and learning experience, particularly for career-oriented adults
who are seeking pay increases or job opportunities that are
directly tied to higher educational attainment; the
effectiveness of our marketing, recruiting and retention
efforts, which is affected by the number and seniority of our
enrollment counselors and other recruiting personnel; the
quality of our academic programs and student services; the
convenience and flexibility of our online delivery platform; the
availability and cost of federal and other funding for student
financial aid; the seasonality of our net revenue, which is
enrollment driven and is typically lowest in our second fiscal
quarter and highest in our fourth fiscal quarter; and general
economic conditions, particularly as they might affect job
prospects in our core disciplines.
The following is a summary of our student enrollment at
December 31, 2005, 2006, and 2007 and September 30,
2007 and 2008 (which included less than 100 students
pursuing non-degree certificates in each period) by degree type
and by instructional delivery method:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
#
|
|
|
%
|
|
|
#
|
|
|
%
|
|
|
#
|
|
|
%
|
|
|
#
|
|
|
%
|
|
|
#
|
|
|
%
|
|
|
Masters degree
|
|
|
6,204
|
|
|
|
73.7
|
|
|
|
7,812
|
|
|
|
73.3
|
|
|
|
9,156
|
|
|
|
62.1
|
|
|
|
8,634
|
|
|
|
64.0
|
|
|
|
12,286
|
|
|
|
56.0
|
|
Bachelors degree
|
|
|
2,218
|
|
|
|
26.3
|
|
|
|
2,850
|
|
|
|
26.7
|
|
|
|
5,598
|
|
|
|
37.9
|
|
|
|
4,865
|
|
|
|
36.0
|
|
|
|
9,671
|
|
|
|
44.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,422
|
|
|
|
100.0
|
|
|
|
10,662
|
|
|
|
100.0
|
|
|
|
14,754
|
|
|
|
100.0
|
|
|
|
13,499
|
|
|
|
100.0
|
|
|
|
21,957
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
#
|
|
|
%
|
|
|
#
|
|
|
%
|
|
|
#
|
|
|
%
|
|
|
#
|
|
|
%
|
|
|
#
|
|
|
%
|
|
|
Online
|
|
|
6,212
|
|
|
|
73.8
|
|
|
|
8,406
|
|
|
|
78.8
|
|
|
|
12,497
|
|
|
|
84.7
|
|
|
|
11,306
|
|
|
|
83.8
|
|
|
|
19,287
|
|
|
|
87.8
|
|
Ground*
|
|
|
2,210
|
|
|
|
26.2
|
|
|
|
2,256
|
|
|
|
21.2
|
|
|
|
2,257
|
|
|
|
15.3
|
|
|
|
2,193
|
|
|
|
16.2
|
|
|
|
2,670
|
|
|
|
12.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,422
|
|
|
|
100.0
|
|
|
|
10,662
|
|
|
|
100.0
|
|
|
|
14,754
|
|
|
|
100.0
|
|
|
|
13,499
|
|
|
|
100.0
|
|
|
|
21,957
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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*
|
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Includes our traditional on-campus
students, as well as our professional studies ground students.
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For the
2008-09
academic year (the academic year that began in May 2008), our
prices per credit hour are $395 for undergraduate online and
professional studies courses, $420 for graduate online courses
(other than graduate nursing), $510 for graduate online nursing
courses, and $645 for undergraduate courses for ground students.
The overall price of each course varies based upon the number of
credit hours per course (with most courses representing three
credit hours), the degree level of the program, and the
discipline. In addition, we charge a fixed $7,740 block
tuition for undergraduate ground students taking between
12 and 18 credit hours per semester, with an additional $645 per
credit hour for credits in excess of 18. A traditional
undergraduate degree typically requires a minimum of 120 credit
hours. The minimum number of credit hours required for a
masters degree and overall cost for such a degree varies
by program, although such programs typically require
approximately 36 credit hours. Our new doctoral program in
education, which is first being offered in the
2008-09
academic year, costs $770 per credit hour and requires
approximately 60 credit hours.
Based on current tuition rates, tuition for a full program would
equate to approximately $15,000 for an online masters
program, approximately $47,000 for a full four-year online
bachelors program, and
48
approximately $62,000 for a full four-year bachelors
program taken on our ground campus. The tuition amounts referred
to above assume no reductions for transfer credits or
scholarships, which many of our students utilize to reduce their
total program costs. The amount of tuition received from our
students for a full program is reduced to the extent credits are
transferred from other institutions. Additionally, tuition is
reduced for some of our students by scholarships. For the years
ended December 31, 2006 and 2007, revenue was reduced by
approximately $8.0 million and $10.3 million, respectively,
as a result of scholarships that we offered to our students. For
the nine months ended September 30, 2007 and 2008, we
offered scholarships with a total value of approximately
$6.6 million and $11.9 million, respectively.
Tuition increases for students in our online and professional
studies ground programs range from 5.0% to 5.3% for our
2008-09
academic year as compared to 2.6% to 4.2% in the prior academic
year. Tuition increases have not historically been, and may not
in the future be, consistent across our programs due to market
conditions and differences in operating costs of individual
programs. Tuition for our traditional ground programs increased
11.2% for our
2008-09
academic year, as compared to 16.0% for the prior academic year.
The larger increases for our traditional ground programs
generally reflect recovery from a significant decrease in ground
tuition rates that we implemented shortly after the 2004
acquisition in an effort to stabilize enrollments and revenues.
We derive a majority of our net revenue from tuition financed by
the Title IV programs. For the years ended
December 31, 2006 and 2007, we derived cash receipts equal
to approximately 67.9%, and 70.2%, respectively, of our net
revenue from Title IV programs. Our students also rely on
scholarships, personal savings, private loans, and employer
tuition reimbursements to pay a portion of their tuition and
related expenses. During fiscal 2007, payments derived from
private loans constituted approximately 5.1% of our net revenue.
Third party lenders independently determine whether a loan to a
student is classified as subprime, and, based on these
determinations, payments derived from subprime loans have
historically constituted less than 0.2% of our net revenue. Our
future revenues could be affected if and to the extent the
Department of Education restricts our participation in the
Title IV programs, as it did during the period between 2005
and 2007. Current conditions in the credit markets have
adversely affected the environment surrounding access to and
cost of student loans. The legislative and regulatory
environment is also changing, and new federal legislation was
recently enacted pursuant to which the Department of Education
is authorized to buy Title IV loans and implement a
lender of last resort program in certain
circumstances. See Risk Factors and
Regulation Regulation of Federal Student
Financial Aid Programs. We do not believe these market and
regulatory conditions have adversely affected us to date, but we
cannot predict whether the new legislation will improve access
to Title IV funding or the impact of any of these
developments on future performance.
Costs
and expenses
Instructional cost and services. Instructional
cost and services consist primarily of costs related to the
administration and delivery of our educational programs. This
expense category includes salaries and benefits for full-time
and adjunct faculty and administrative personnel, costs
associated with online faculty, information technology costs,
curriculum and new program development costs, and costs
associated with other support groups that provide service
directly to the students. This category also includes an
allocation of depreciation, amortization, rent, and occupancy
costs attributable to the provision of educational services.
Classroom facilities are leased or, in some cases, are provided
by the students employers at no charge to us. We expect
instructional costs and services as a percentage of tuition and
other net revenue to continue to decline as we leverage our
support services that are in place over a larger tuition and
enrollment base.
Selling and promotional. Selling and
promotional expenses include salaries and benefits of personnel
engaged in the marketing, recruitment, and retention of
students, as well as advertising costs associated with
purchasing leads, hosting events and seminars, and producing
marketing materials. Our selling and promotional expenses are
generally affected by the cost of advertising media and leads,
the efficiency of our marketing and recruiting efforts,
salaries, and benefits for our enrollment personnel, and
expenditures on advertising initiatives for new and existing
academic programs. This category also includes an allocation of
depreciation, amortization, rent, and occupancy costs
attributable to selling and promotional activities. Selling and
promotional costs are expensed as incurred. As a result of the
removal of our growth restrictions in October 2006, we more than
quadrupled the number of our enrollment counselors between
December 31, 2006
49
and September 30, 2008 in an effort to increase our
recruiting activities and enroll prospective students. We also
leased new enrollment centers in Arizona and Utah, and we intend
to continue to increase the number of our enrollment counselors
in these centers to increase enrollment and enhance student
retention. We incur immediate expenses in connection with hiring
new enrollment counselors while these individuals undergo
training, and typically do not achieve full productivity or
generate enrollments from these enrollment counselors until four
to six months after their dates of hire.
Selling and promotional costs also include revenue share
arrangements with related parties pursuant to which we pay a
percentage of the net revenue that we actually receive from
applicants recruited by those entities that matriculate at Grand
Canyon University. The related party bears all costs associated
with the recruitment of these applicants. For the years ended
December 31, 2005, 2006, and 2007, and for the nine month
periods ended September 30, 2007 and 2008, we expensed
approximately $2.8 million, $3.7 million,
$4.3 million, $3.1 million, and $4.3 million,
respectively, pursuant to these arrangements. As we increase our
internal recruiting, marketing, and enrollment staff, we expect
this revenue share as a proportion of total revenue to decline.
General and administrative. General and
administrative expenses include salaries and benefits of
employees engaged in corporate management, finance, human
resources, facilities, compliance, and other corporate
functions. General and administrative expenses also include bad
debt expense and an allocation of depreciation, amortization,
rent and occupancy costs attributable to general and
administrative functions.
Royalty to former owner. In connection with
our February 2004 acquisition of the assets of Grand Canyon
University by several of our current stockholders, we entered
into a royalty fee arrangement with the former owner in which we
agreed to pay a stated percentage of cash revenue generated by
our online programs. For the years ended December 31, 2005,
2006, and 2007, and for the nine month periods ended
September 30, 2007 and 2008, we expensed $1.6 million,
$2.7 million, $3.8 million, $2.6 million, and
$1.6 million, respectively, in connection with this
arrangement. This arrangement has been terminated, as discussed
below.
Interest expense. Interest expense consists
primarily of interest charges on our capital lease obligations
and on the outstanding balances of our notes payable and line of
credit.
Factors
affecting comparability
We have set forth below selected factors that we believe have
had, or can be expected to have, a significant effect on the
comparability of recent or future results of operations:
Conversion to corporate status. On
August 24, 2005, we converted from a Delaware limited
liability company to a Delaware corporation pursuant to
Section 265 of the DGCL. As a limited liability company, we
were treated as a partnership for U.S. federal and state
income tax purposes and, as such, we were not subject to
taxation. For all periods subsequent to such date, we have been
and will continue to be subject to
corporate-level U.S. federal and state income taxes.
Public company expenses. Upon
consummation of our initial public offering, we will become a
public company, and will have our shares listed for trading on
the Nasdaq Global Market. As a result, we will need to comply
with laws, regulations, and requirements that we did not need to
comply with as a private company, including certain provisions
of the Sarbanes-Oxley Act of 2002, related SEC regulations, and
the requirements of Nasdaq. Compliance with the requirements of
being a public company will require us to increase our general
and administrative expenses in order to pay our employees, legal
counsel, and accountants to assist us in, among other things,
external reporting, instituting and monitoring a more
comprehensive compliance and board governance function,
establishing and maintaining internal control over financial
reporting in accordance with Section 404 of the
Sarbanes-Oxley Act of 2002, and preparing and distributing
periodic public reports in compliance with our obligations under
the federal securities laws. In addition, being a public company
will make it more expensive for us to obtain director and
officer liability insurance. We estimate that incremental annual
public company costs will be between $3.0 million and
$4.0 million.
Settlement with former owner. To
resolve a dispute with our former owner arising from our
acquisition of Grand Canyon University and subsequent lease of
our campus, we entered into a standstill agreement in September
2007 pursuant to which we agreed with the former owner to stay
all pending legal proceedings
50
through April 15, 2008. In accordance with the terms of the
standstill agreement, we made an initial non-refundable
$3.0 million payment to the former owner in October 2007
and made an additional $19.5 million payment to the former
owner in April 2008, with these amounts serving as
consideration for: (i) the satisfaction in full of all past
and future royalties due to the former owner under a royalty
agreement; (ii) the acquisition by us of a parcel of real
estate owned by the former owner on our campus; (iii) the
termination of a sublease agreement pursuant to which the former
owner leased office space on our campus; (iv) the
assumption by us of all future payment obligations in respect of
certain gift annuities made to the school by donors prior to the
acquisition; (v) the cancellation of a warrant we issued to
the former owner in the lease transaction; and (vi) the
satisfaction in full of a $1.25 million loan made by the
former owner to us in the lease transaction (including all
accrued and unpaid interest thereon). Most of the amounts
payable to the former owner under the royalty arrangement in
2005, and all of the amounts payable in 2006 and 2007, were
accrued and not paid due to the dispute. A portion of the
settlement payments has been treated as a prepaid royalty asset
that will be amortized over 20 years at approximately
$0.3 million per year, which differs from the historical
royalty expense.
Management fees and expenses. In
connection with an August 2005 investment led by Endeavour
Capital, we entered into a professional services agreement with
Endeavour Capitals general partner. Concurrent with the
closing of this offering, the professional services agreement
will terminate by its terms. For the years ended
December 31, 2005, 2006, and 2007, and for the nine month
periods ended September 30, 2007 and 2008, we incurred
$0.1 million, $0.3 million, $0.3 million,
$0.2 million, and $0.3 million, respectively, in fees
and expenses under this agreement. In addition, through
December 31, 2006, we were party to two additional
professional services agreements, one with an entity affiliated
with a former director and another affiliated with a significant
stockholder, both of which terminated in accordance with their
respective terms in 2006. For the years ended December 31,
2005 and 2006, we paid an aggregate of $0.4 million and
$0.7 million, respectively, under these agreements. See
Certain Relationships and Related Transactions
located elsewhere in this prospectus for additional information.
Stock-based and other executive
compensation. Prior to this offering, we have
not granted or issued any stock-based compensation. Accordingly,
we have not recognized any stock-based compensation expense.
Upon the consummation of this offering, we intend to make
substantial awards to our directors, officers, and employees,
including certain grants to our new Chief Executive Officer and
to other employees that will be fully vested upon grant. As a
result, we expect to incur non-cash, stock-based compensation
expenses in future periods, including expenses of approximately
$5.9 million in the fourth quarter of 2008.
General and administrative expenses. In
July 2008, we hired a new Chief Executive Officer, Chief
Financial Officer, and Executive Vice President, as well as
other financial and accounting personnel. Accordingly,
compensation expenses, as reflected in our general and
administrative expenses, will be higher beginning in the third
quarter of 2008.
In connection with the Office of Inspector General investigation
and the qui tam litigation, we expect to incur increased
legal expenses associated with responding to and/or defending
such matters, including an estimated $1.1 million in the
fourth quarter of 2008 as compared to the approximately
$0.2 million in legal expenses incurred in the fourth
quarter of 2007.
License agreement. In June 2004, we
entered into a license agreement with Blanchard Education, LLC
(Blanchard) relating to our use of the Ken Blanchard
name for our College of Business. The license agreement remains
in effect (unless terminated earlier) until February 6,
2016. Under the terms of that agreement, we agreed to pay
Blanchard royalties and to issue to Blanchard up to
498 shares of common stock, with the actual number of
shares to be issued to be contingent upon our achievement of
stated enrollment levels in the College of Business programs
during the term of the agreement. On December 31, 2006, it
became probable that Blanchard would earn 100 shares under
this agreement associated with the first enrollment threshold
and, during the third quarter 2007, those 100 shares were
earned due to the enrollment threshold being met. On May 9,
2008, the terms of the agreement were amended, pursuant to which
Blanchard was issued a total of 200 shares of common stock
in full settlement of all shares owed and contingently owed
under this agreement. Thus, an additional 100 shares became
earned on that date and all remaining performance conditions
based on enrollment thresholds were terminated. The shares
issued were valued at the
51
date the shares were earned and have been treated as a prepaid
royalty asset that will be amortized over the remaining term of
the license agreement. We will recognize approximately $0.4
million per year in amortization expense related to the issuance
of the common stock through February 2016.
Internal
Control Over Financial Reporting
Overview. We have material weaknesses
in internal control over financial reporting. In connection with
the preparation of our 2005, 2006, and 2007 financial
statements, and our financial statements for the six month
period ended June 30, 2008, we identified matters involving
our internal control over financial reporting that constituted
material weaknesses as defined under the standards of the
American Institute of Certified Public Accountants and caused us
to conclude that there was more than a remote likelihood that a
material misstatement of our annual or interim financial
statements would not be prevented or detected on a timely basis
by our employees in the normal course of performing their
assigned functions. We have restated our financial statements as
of December 31, 2006 and 2007 and for the years ended
December 31, 2005, 2006, and 2007. See Note 3,
Restatement of Financial Statements, to our
financial statements, which are included elsewhere in this
prospectus.
Material weaknesses. In connection with
the preparation of our 2005, 2006, and 2007 financial
statements, and our financial statements for the six month
period ended June 30, 2008, we identified errors regarding
our accounting for the following transactions:
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In connection with our formation in February 2004, an entity
owned in part by our Executive Chairman and our General Counsel
contributed certain intangible assets to us, and we improperly
recorded these contributed assets at our estimate of their fair
value rather than at their carryover basis.
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In connection with our acquisition of Grand Canyon University
from the former owner in February 2004, we improperly
accounted for a perpetual royalty arrangement between us and the
former owner as goodwill rather than as a current period
expense. Later, in connection with a settlement agreement we
entered into with the former owner in 2007 that provided for a
termination of this royalty arrangement, we improperly accounted
for a partial settlement payment as a current period expense
rather than as a prepaid royalty subject to amortization.
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In connection with our entry into a lease agreement for our
ground campus and buildings in June 2004, we improperly
accounted for the arrangement as an operating lease rather than
accounting for certain components of the lease as a capital
lease.
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In all periods, we failed to properly account for the issuance
of certain common stock and equity linked instruments to third
parties.
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During the six month period ended June 30, 2008, we
concluded that a significant increase in our allowance for
doubtful accounts was required. A portion of the increase has
been determined to be the correction of an error from prior
periods and thus the accompanying financial statements have been
restated to reflect this increase.
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We failed to properly account for deferred taxes at the date of
conversion from a limited liability company to a corporation.
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We believe that certain of the control deficiencies related to
these errors constitute material weaknesses in our internal
control over financial reporting. Such material weaknesses
related to our lack of processes and controls that would ensure
the proper recording of assets, expenses, leases, and equity
instruments in accordance with GAAP.
Management is committed to remediating the control deficiencies
that constitute the material weaknesses described herein by
implementing changes to our internal control over financial
reporting. We have implemented a number of significant changes
and improvements in our internal control over financial
reporting during fiscal year 2008. Our Chief Financial Officer
has taken responsibility for implementing
52
changes and improvements in the internal control over financial
reporting and remediate the control deficiencies that gave rise
to the material weaknesses. Specifically, these changes include:
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engaging a new Chief Financial Officer and hiring additional
financial and accounting personnel, all of whom have experience
managing or working in the corporate accounting department of a
large publicly traded education company;
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making numerous process changes in the financial reporting area,
including additional oversight and review; and
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conducting training of our accounting staff for purposes of
enabling them to recognize and properly account for transactions
of the type described above.
|
Management plans to continue to implement further changes and
improvements during the remainder of the current fiscal year. We
cannot assure you that the measures we have taken to date and
plan to take will remediate the material weaknesses we have
identified. Our current independent registered public accounting
firm has not evaluated the measures we have taken or plan to
take in order to address the material weaknesses described above.
Critical
Accounting Policies and Estimates
The discussion of our financial condition and results of
operations is based upon our financial statements, which have
been prepared in accordance with U.S. generally accepted
accounting principles, or GAAP. During the preparation of these
financial statements, we are required to make estimates and
assumptions that affect the reported amounts of assets,
liabilities, revenues, costs and expenses, and related
disclosures. On an ongoing basis, we evaluate our estimates and
assumptions, including those discussed below. We base our
estimates on historical experience and on various other
assumptions that we believe are reasonable under the
circumstances. The results of our analysis form the basis for
making assumptions about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions, and the impact of such differences
may be material to our financial statements.
We believe that the following critical accounting policies
involve our more significant judgments and estimates used in the
preparation of our financial statements:
Revenue recognition. Tuition revenue is
recognized monthly over the applicable period of instruction.
Deferred revenue and student deposits in any period represent
the excess of tuition, fees, and other student payments received
as compared to amounts recognized as revenue on the statement of
operations and are reflected as current liabilities on our
balance sheet. Our educational programs have starting and ending
dates that differ from our fiscal quarters. Therefore, at the
end of each fiscal quarter, a portion of our revenue from these
programs is not yet earned in accordance with the SECs
Staff Accounting Bulletin No. 104, Revenue
Recognition in Financial Statements. If a student withdraws
prior to the end of the third week of a semester, we refund all
or a portion of tuition already paid pursuant to our refund
policy, which generally results in a reduction in deferred
revenue and student deposits.
Allowance for doubtful accounts. Bad
debt expense is recorded as a general and administrative
expense. We record an allowance for doubtful accounts for
estimated losses resulting from the inability, failure, or
refusal of our students to make required payments. We determine
the adequacy of our allowance for doubtful accounts based on an
analysis of our aging of our accounts receivable and historical
bad debt experience. We generally write off accounts receivable
balances deemed uncollectible at the time the account is
returned by an outside collection agency. However, we continue
to reflect accounts receivable with offsetting allowances as
long as management believes there is a reasonable possibility of
collection. As a result, our allowance for doubtful accounts has
increased on an annual basis as bad debt expense has exceeded
amounts written off. During the second half of 2008, we expect
to begin to write off existing and new doubtful accounts no
later than one year after the revenue is generated, which will
likely result in a significant reduction in our accounts
receivable and related allowances. We believe our reserves are
adequate to cover any write offs we may make.
53
Long-Lived Assets. We evaluate the
recoverability of our long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the
carrying amount of an asset to undiscounted future net cash
flows expected to be generated by the assets. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets.
Income taxes. On August 24, 2005,
we converted from a limited liability company to a corporation.
For all periods subsequent to such date, we have been and will
continue to be subject to corporate-level U.S. federal
and state income taxes. Effective January 1, 2008, we
adopted FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48).
FIN 48 prescribes a more-likely-than-not threshold for
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. We
account for income taxes as prescribed by Statement of Financial
Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes
(SFAS No. 109). SFAS No. 109
prescribes the use of the asset and liability method to compute
the differences between the tax basis of assets and liabilities
and the related financial amounts using currently enacted tax
laws. We have deferred tax assets, which are subject to periodic
recoverability assessments. Valuation allowances are
established, when necessary, to reduce deferred tax assets to
the amount that more likely than not will be realized.
Realization of the deferred tax assets is principally dependent
upon achievement of projected future taxable income offset by
deferred tax liabilities. We evaluate the realizability of the
deferred tax assets annually. Since becoming a taxable
corporation, we have not recorded any valuation allowances to
date on our deferred income tax assets.
Results
of Operations
The following table sets forth statements of operations data as
a percentage of net revenue for each of the periods indicated:
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Nine Months
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Ended
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Year Ended December 31,
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September 30,
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2005
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2006
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2007
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2007
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2008
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|
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(Restated)(1)
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(Unaudited)
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Net revenue
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100.0
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%
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|
100.0
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%
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|
100.0
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%
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|
|
100.0
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%
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|
100.0
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%
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Operating expenses
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Instructional cost and services
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54.2
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43.4
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39.3
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40.2
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33.7
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Selling and promotional
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27.1
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27.9
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35.4
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35.5
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42.0
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General and administrative
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25.0
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20.8
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17.1
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17.3
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14.6
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Royalty to former owner
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3.2
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3.7
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3.8
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3.8
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1.5
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Total operating expenses
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109.5
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95.8
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95.6
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96.8
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91.8
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Operating income (loss)
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(9.5
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)
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4.2
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4.4
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3.2
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8.2
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Interest expense
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(5.9
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)
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|
(3.9
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)
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|
(3.0
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)
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|
(3.2
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)
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|
(2.0
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)
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Interest income
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|
0.5
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1.2
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1.2
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1.3
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0.5
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Income (loss) before income taxes
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(14.9
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)
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1.5
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2.6
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1.3
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6.7
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Income tax expense (benefit)
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|
(6.6
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)
|
|
|
0.7
|
|
|
|
1.0
|
|
|
|
0.5
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(8.3
|
)
|
|
|
0.8
|
|
|
|
1.6
|
|
|
|
0.8
|
|
|
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Our financial statements at December 31, 2006 and 2007 and
for each of the three years in the period ended
December 31, 2007 have been restated. See Note 3,
Restatement of Financial Statements, included in our
financial statements, which are presented elsewhere in this
prospectus. |
54
Nine
Months Ended September 30, 2008 Compared to Nine Months
Ended September 30, 2007
Net revenue. Our net revenue for the nine
months ended September 30, 2008 was $109.6 million, an
increase of $41.1 million, or 60.1%, as compared to net
revenue of $68.5 million for the nine months ended
September 30, 2007. This increase was primarily due to
increased enrollment and, to a lesser extent, increases in the
average tuition per student caused by tuition price increases
and an increase in the average credits per student, partially
offset by an increase in institutional scholarships.
End-of-period enrollment increased 62.7% between
September 30, 2007 and 2008, as we were able to continue
our growth and increase our recruitment, marketing, and
enrollment operations following the elimination of the
Department of Educations growth restrictions in October
2006.
Instructional cost and services expenses. Our
instructional cost and services expenses for the nine months
ended September 30, 2008 were $37.0 million, an
increase of $9.5 million, or 34.4%, as compared to
instructional cost and services expenses of $27.5 million
for the nine months ended September 30, 2007. This increase
was primarily due to increases in instructional compensation and
related expenses, faculty compensation, depreciation and
amortization, and other miscellaneous instructional costs and
services of $3.5 million, $2.9 million,
$1.0 million, and $2.1 million, respectively. These
increases are all attributable to the increased headcount (both
staff and faculty) needed to provide student instruction and
support services as a result of the increase in enrollments. Our
instructional cost and services expenses as a percentage of net
revenue decreased by 6.5% to 33.7% for the nine months ended
September 30, 2008, as compared to 40.2% for the nine
months ended September 30, 2007. This decrease was a result
of the continued shift of our student population to online
programs and our ability to leverage the relatively fixed cost
structure of our campus-based facilities and ground faculty
across an increasing revenue base.
Selling and promotional expenses. Our selling
and promotional expenses for the nine months ended
September 30, 2008 were $46.0 million, an increase of
$21.7 million, or 89.5%, as compared to selling and
promotional expenses of $24.3 million for the nine months
ended September 30, 2007. This increase was primarily due
to increases in selling and promotional employee compensation
and related expenses, advertising, revenue sharing expense, and
other selling and promotional related costs of
$12.9 million, $6.5 million, $1.2 million, and
$1.1 million, respectively. These increases were driven by
a substantial expansion in our marketing efforts following the
removal of our growth restrictions by the Department of
Education, which resulted in an increase in recruitment,
marketing, and enrollment staffing, the opening of new
enrollment facilities in Arizona and Utah, and expenses related
to our revenue sharing arrangement. Our selling and promotional
expenses as a percentage of net revenue increased by 6.5% to
42.0% for the nine months ended September 30, 2008, from
35.5% for the nine months ended September 30, 2007. This
increase occurred as a result of a significant increase in the
number of our enrollment counselors to increase our efforts to
enroll prospective students and also increased lead purchases to
support the additional enrollment counselors. In this regard, we
incur immediate expenses in connection with hiring new
enrollment counselors while these individuals undergo training,
and typically do not achieve full productivity or generate
enrollments from these enrollment counselors until four to six
months after their dates of hire. We plan to continue to add
additional enrollment counselors in the future, although the
number of additional hires as a percentage of the total
headcount is expected to decrease, and we therefore plan to
reduce selling and promotional expenses as a percentage of net
revenue in the future.
General and administrative expenses. Our
general and administrative expenses for the nine months ended
September 30, 2008 were $16.0 million, an increase of
$4.1 million, or 35.0%, as compared to general and
administrative expenses of $11.9 million for the nine
months ended September 30, 2007. This increase was
primarily due to increases in legal, audit and corporate
insurance; bad debt expense; employee compensation; and other
general and administrative expenses of $1.1 million,
$1.0 million, $0.8 million and $1.2 million,
respectively. The increase in legal, audit, and corporate
insurance is primarily related to legal costs associated with
the Sungard matter, which went to arbitration in the second
quarter of fiscal 2008, as well as costs incurred related to the
OIG investigation. See Business Legal
Proceedings. Bad debt expense increased to
$5.3 million for the nine months ended September 30,
2008 from $4.3 million for the nine months ended
September 30, 2007 as a result of an increase in net
revenue. The other general and administrative expense increase
was attributable to expenditures made to continue to support the
growth of our business. Our general
55
and administrative expenses as a percentage of net revenue
decreased by 2.4% to 14.9% for the nine months ended
September 30, 2008, from 17.3% for the nine months ended
September 30, 2007, primarily due to a decrease in our bad
debt expense and employee compensation and related benefits as a
percentage of net revenue between periods from 6.3% and 4.3% of
revenue during the first nine months of 2007, respectively, to
4.8% and 3.4% of net revenue during the first nine months of
2008, respectively. The improvement in bad debt expense as a
percentage of net revenue is primarily due to an improvement in
our aging between periods and an increased revenue base. The
decrease in employee compensation and related benefits as a
percentage of net revenue is the result of us leveraging our
current staffing over a larger revenue base.
Royalty to former owner. In connection with
our royalty fee arrangement with the former owner related to
online revenue, we incurred royalty expenses for the nine months
ended September 30, 2008 of $1.6 million, a decrease
of $1.0 million, or 37.6%, as compared to royalty expenses
incurred of $2.6 million for the nine months ended
September 30, 2007 as a result of the elimination of the
obligation to pay royalties to the former owner effective
April 15, 2008. As discussed above, the only related
expense in future periods will be the approximately
$0.3 million in annual amortization of the prepaid royalty
asset that was established as a result of payments made to
eliminate this future obligation. Our royalty expense as a
percentage of net revenue decreased to 1.5% for the nine months
ended September 30, 2008 from 3.8% for the nine months
ended September 30, 2007.
Interest expense. Our interest expense for
both the nine month periods ended September 30, 2008 and
2007 was $2.2 million as the average level of borrowings
remained fairly consistent between periods.
Interest income. Our interest income for the
nine months ended September 30, 2008 was $0.5 million,
a decrease of $0.3 million from $0.8 million for the
nine months ended September 30, 2007, as a result of
decreased levels of cash and cash equivalents.
Income tax expense. Income tax expense for the
nine months ended September 30, 2008 was $2.8 million,
an increase of $2.5 million from $0.3 million for the
nine months ended September 30, 2007. This increase was
primarily attributable to increased income before income taxes,
partially offset by a slight decrease in our effective income
tax rate to 39.1% from 40.0%.
Net income. Our net income for the nine months
ended September 30, 2008 was $4.5 million, an increase
of $4.0 million, or 760%, as compared to net income of
$0.5 million for the nine months ended September 30,
2007, due to the factors discussed above.
Year
Ended December 31, 2007 Compared to Year Ended
December 31, 2006
Net revenue. Our net revenue for the year
ended December 31, 2007 was $99.3 million, an increase
of $27.2 million, or 37.7%, as compared to net revenue of
$72.1 million for the year ended December 31, 2006.
This increase was primarily due to increased enrollment and, to
a lesser extent, increases in tuition rates, including a 2.6% to
4.2% tuition increase for students in our online programs that
took effect in May 2007, partially offset by an increase in
institutional scholarships. End-of-period enrollment increased
38.4% in 2007 compared to 2006, as we were able to continue our
growth and increase our recruitment, marketing, and enrollment
operations following the elimination of the Department of
Educations growth restrictions in October 2006.
Instructional cost and services expenses. Our
instructional cost and services expenses for the year ended
December 31, 2007 were $39.1 million, an increase of
$7.8 million, or 24.8%, as compared to instructional cost
and services expenses of $31.3 million for the year ended
December 31, 2006. This increase was primarily due to
increases in instructional compensation expense and student
support services as a result of the increase in enrollments and
the addition of certain academic support services, such as the
establishment of our Office of Assessment and Institutional
Research. Our instructional cost and services expenses as a
percentage of net revenue decreased by 4.1% to 39.3% for the
year ended December 31, 2007, as compared to 43.4% for the
year ended December 31, 2006. This decrease was a result of
the continued shift of our student population to online programs
and our ability to leverage the relatively fixed cost structure
of our campus-based facilities and ground faculty across an
increasing revenue base.
56
Selling and promotional expenses. Our selling
and promotional expenses for the year ended December 31,
2007 were $35.1 million, an increase of $15.1 million,
or 74.9%, as compared to selling and promotional expenses of
$20.1 million for the year ended December 31, 2006.
This increase was driven by a substantial expansion in our
marketing efforts following the removal of our growth
restrictions by the Department of Education, which resulted in
an increase in recruitment, marketing, and enrollment staffing,
the opening of new enrollment facilities in Arizona and Utah,
and expenses related to our revenue sharing arrangement. Our
selling and promotional expenses as a percentage of net revenue
increased by 7.5% to 35.4% for the year ended December 31,
2007, from 27.9% for the year ended December 31, 2006. This
increase occurred as a result of a significant increase in the
number of our enrollment counselors to increase our efforts to
enroll prospective students and also increased marketing and
retention staffing. In this regard, we incur immediate expenses
in connection with hiring new enrollment counselors while these
individuals undergo training, and typically do not achieve full
productivity or generate enrollments from these enrollment
counselors until four to six months after their dates of hire.
General and administrative expenses. Our
general and administrative expenses for the year ended
December 31, 2007 were $17.0 million, an increase of
$2.0 million, or 13.3%, as compared to general and
administrative expenses of $15.0 million for the year ended
December 31, 2006. Bad debt expense increased to
$6.3 million for the year ended December 31, 2007 from
$4.7 million for the year ended December 31, 2006
primarily as a result of a proportional increase in net revenue.
The general and administrative expense increase was also
attributable to expenditures made to continue to support the
growth of our business. Our general and administrative expenses
as a percentage of net revenue decreased by 3.7% to 17.1% for
the year ended December 31, 2007, from 20.8% for the year
ended December 31, 2006, as we benefited from leveraging
our prior infrastructure investments over a larger enrollment
and revenue base.
Royalty to former owner. In connection with
our royalty fee arrangement with the former owner related to
online revenue, we incurred royalty expenses for the year ended
December 31, 2007 of $3.8 million, an increase of
$1.1 million, or 41.2%, as compared to royalty expenses
incurred of $2.7 million for the year ended
December 31, 2006. Our royalty expense as a percentage of
net revenue remained relatively steady for the years ended
December 31, 2007 and 2006, increasing to 3.8% from 3.7%.
Interest expense. Interest expense for the
year ended December 31, 2007 was $3.0 million, an
increase of $0.2 million, from $2.8 million for the
year ended December 31, 2006 due to a higher average level
of borrowings in 2007.
Interest income. Interest income for the year
ended December 31, 2007 was $1.2 million, an increase
of $0.3 million, or 28.5%, from $0.9 million for the
year ended December 31, 2006, as a result of increased
levels of cash and cash equivalents, offset by slightly lower
interest rates.
Income tax expense. Income tax expense for the
year ended December 31, 2007 was $1.0 million, an
increase of $0.5 million, or 92.1%, from $0.5 million
for the year ended December 31, 2006. This increase was
primarily attributable to increased income before income taxes,
partially offset by a decrease in our effective income tax rate
to 40.0% from 46.9%.
Net income. Our net income for the year ended
December 31, 2007 was $1.5 million, an increase of
$0.9 million, or 155.2%, as compared to net income of
$0.6 million for the year ended December 31, 2006, due
to the factors discussed above.
Year
Ended December 31, 2006 Compared to Year Ended
December 31, 2005
Net revenue. Our net revenue for the year
ended December 31, 2006 was $72.1 million, an increase
of $20.3 million, or 39.2%, as compared to net revenue of
$51.8 million for the year ended December 31, 2005.
This increase was primarily due to increased enrollment,
increases in tuition rates, including a 8.3% to 12.5% tuition
increase for students in our online programs that took effect in
May 2006, and reduced levels of institutional scholarships.
End-of-period enrollment increased 26.6% in 2006 compared to
2005, as a result of improved productivity in our recruitment,
marketing, and enrollment operations and the launch of many of
our
57
ground programs in an online delivery format, as limited by the
growth restrictions imposed by the Department of Education,
which were eliminated in October 2006.
Instruction cost and services expenses. Our
instructional cost and services expenses for the year ended
December 31, 2006 were $31.3 million, an increase of
$3.2 million, or 11.5%, as compared to instructional cost
and services expenses of $28.1 million for the year ended
December 31, 2005. This increase was primarily due to
increases in instructional compensation expense and student
support services as a result of the increase in enrollments. Our
instructional cost and services expenses as a percentage of net
revenue decreased by 10.8% to 43.4% for the year ended
December 31, 2006, as compared to 54.2% for the year ended
December 31, 2005. This decrease in 2006 was a result of
the continued shift of our student population to online
programs, our ability to leverage the relatively fixed cost
structure of our campus-based facilities and ground faculty
across an increasing revenue base, and more efficient course
scheduling and faculty utilization.
Selling and promotional expenses. Our selling
and promotional expenses for the year ended December 31,
2006 were $20.1 million, an increase of $6.0 million,
or 43.0%, as compared to selling and promotional expenses of
$14.0 million for the year ended December 31, 2005. As
a percentage of net revenue, our selling and promotional
expenses remained relatively steady for the years ended
December 31, 2006 and 2005, increasing to 27.9% from 27.1%.
General and administrative expenses. Our
general and administrative expenses for the year ended
December 31, 2006 were $15.0 million, an increase of
$2.0 million, or 15.8%, as compared to general and
administrative expenses of $13.0 million for the year ended
December 31, 2005. Bad debt expense increased to
$4.7 million for the year ended December 31, 2006 from
$2.6 million for the year ended December 31, 2005 due
to an increase in net revenue and managements assessment
of our rapidly growing student base and changes in payment
trends. Our general and administrative expenses as a percentage
of net revenue decreased by 4.2% to 20.8% for the year ended
December 31, 2006, from 25.0% for the year ended
December 31, 2005, as we benefited from leveraging our
prior infrastructure investments over a larger enrollment and
revenue base.
Royalty to former owner. In connection with
our royalty fee arrangement with our former owner, we incurred
royalty expenses for the year ended December 31, 2006 of
$2.7 million, an increase of $1.1 million, or 65.4%,
as compared to royalty expenses incurred of $1.6 million
for the year ended December 31, 2005. Our royalty expense
as a percentage of net revenue increased by 0.6% to 3.7% for the
year ended December 31, 2006, from 3.1% for the year ended
December 31, 2005. These increases were attributable to the
increase in our net revenue derived from our online programs,
which grew at a faster rate than other revenue sources.
Interest expense. Interest expense for the
year ended December 31, 2006 was $2.8 million, a
decrease of $0.3 million, or 8.7%, from $3.1 million
for the year ended December 31, 2005. The decrease was
primarily due to a lower average level of borrowings in 2006.
Interest income. Interest income for the year
ended December 31, 2006 was $0.9 million, an increase
of $0.6 million, from $0.3 million for the year ended
December 31, 2005 as a result of increased levels of cash
and cash equivalents earning interest.
Income tax expense (benefit). Income tax
expense for the year ended December 31, 2006 was
$0.5 million, an increase of $4.0 million from income
tax benefit of $3.4 million for the year ended
December 31, 2005. This increase was primarily attributable
to our net income before income taxes and a change in our
effective income tax rate to 46.9% from 44.5%.
Net income (loss). Our net income for the year
ended December 31, 2006 was $0.6 million, an increase
of $4.9 million as compared to net loss of
$4.3 million for the year ended December 31, 2006 due
to the factors discussed above.
58
Quarterly
Results and Seasonality
The following tables set forth certain unaudited financial and
operating data in the first and second quarters of 2008 and each
quarter during the years ended December 31, 2006 and 2007.
We believe that the unaudited information reflects all
adjustments, which include only normal and recurring
adjustments, necessary to present fairly the information below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
Second Quarter
|
|
|
Third Quarter
|
|
|
Fourth Quarter
|
|
|
|
(In thousands, except enrollment data)
|
|
|
|
(unaudited)
|
|
|
|
(restated)
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
16,695
|
|
|
$
|
16,009
|
|
|
$
|
17,580
|
|
|
$
|
21,827
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
7,545
|
|
|
|
7,154
|
|
|
|
7,540
|
|
|
|
9,048
|
|
Selling and promotional
|
|
|
4,449
|
|
|
|
4,515
|
|
|
|
5,376
|
|
|
|
5,753
|
|
General and administrative
|
|
|
3,215
|
|
|
|
3,645
|
|
|
|
3,645
|
|
|
|
4,506
|
|
Royalty to former owner
|
|
|
438
|
|
|
|
387
|
|
|
|
1,354
|
|
|
|
499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
15,647
|
|
|
|
15,701
|
|
|
|
17,915
|
|
|
|
19,806
|
|
Operating income (loss)
|
|
|
1,048
|
|
|
|
308
|
|
|
|
(335
|
)
|
|
|
2,021
|
|
Net interest expense
|
|
|
(215
|
)
|
|
|
(499
|
)
|
|
|
(317
|
)
|
|
|
(884
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
833
|
|
|
|
(191
|
)
|
|
|
(652
|
)
|
|
|
1,137
|
|
Income tax expense (benefit)
|
|
|
391
|
|
|
|
(90
|
)
|
|
|
(306
|
)
|
|
|
534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
442
|
|
|
$
|
(101
|
)
|
|
$
|
(346
|
)
|
|
$
|
603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period end enrollment
|
|
|
9,088
|
|
|
|
8,137
|
|
|
|
10,217
|
|
|
|
10,662
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
23,213
|
|
|
$
|
20,858
|
|
|
$
|
24,401
|
|
|
$
|
30,854
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
8,845
|
|
|
|
8,710
|
|
|
|
9,976
|
|
|
|
11,519
|
|
Selling and promotional
|
|
|
6,008
|
|
|
|
8,178
|
|
|
|
10,105
|
|
|
|
10,857
|
|
General and administrative
|
|
|
3,614
|
|
|
|
4,763
|
|
|
|
3,471
|
|
|
|
5,153
|
|
Royalty to former owner
|
|
|
607
|
|
|
|
1,022
|
|
|
|
956
|
|
|
|
1,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
19,074
|
|
|
|
22,673
|
|
|
|
24,508
|
|
|
|
28,726
|
|
Operating income (loss)
|
|
|
4,139
|
|
|
|
(1,815
|
)
|
|
|
(107
|
)
|
|
|
2,128
|
|
Net interest expense
|
|
|
(448
|
)
|
|
|
(375
|
)
|
|
|
(526
|
)
|
|
|
(454
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
3,691
|
|
|
|
(2,190
|
)
|
|
|
(633
|
)
|
|
|
1,674
|
|
Income tax expense (benefit)
|
|
|
1,475
|
|
|
|
(875
|
)
|
|
|
(253
|
)
|
|
|
669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,216
|
|
|
$
|
(1,315
|
)
|
|
$
|
(380
|
)
|
|
$
|
1,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period end enrollment
|
|
|
11,397
|
|
|
|
10,332
|
|
|
|
13,499
|
|
|
|
14,754
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
35,709
|
|
|
$
|
34,566
|
|
|
$
|
39,351
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
11,620
|
|
|
|
12,408
|
|
|
|
12,967
|
|
|
|
|
|
Selling and promotional
|
|
|
12,586
|
|
|
|
14,887
|
|
|
|
18,562
|
|
|
|
|
|
General and administrative
|
|
|
4,541
|
|
|
|
6,419
|
|
|
|
5,032
|
|
|
|
|
|
Royalty to former owner
|
|
|
1,022
|
|
|
|
466
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
29,769
|
|
|
|
34,180
|
|
|
|
36,685
|
|
|
|
|
|
Operating income
|
|
|
5,940
|
|
|
|
386
|
|
|
|
2,666
|
|
|
|
|
|
Net interest expense
|
|
|
(560
|
)
|
|
|
(515
|
)
|
|
|
(573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
5,380
|
|
|
|
(129
|
)
|
|
|
2,093
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
2,076
|
|
|
|
(49
|
)
|
|
|
841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,304
|
|
|
$
|
(80
|
)
|
|
$
|
1,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period end enrollment
|
|
|
17,486
|
|
|
|
16,510
|
|
|
|
21,957
|
|
|
|
|
|
59
Our net revenue and operating results normally fluctuate as a
result of seasonal variations in our business, principally due
to changes in enrollment. Student population varies as a result
of new enrollments, graduations, and student attrition. A
portion of our ground students do not attend courses during the
summer months (June through August), which affects our results
for our second and third fiscal quarters. Because a significant
amount of our campus costs are fixed, the lower revenue
resulting from the decreased enrollment has historically
contributed to operating losses during those periods. As we
increase the relative proportion of our online students, we
expect this summer effect to lessen. Partially offsetting this
summer effect in the third quarter has been the sequential
quarterly increase in enrollments that has occurred as a result
of the traditional fall school start. This increase in
enrollments also has occurred in the first quarter,
corresponding to calendar year matriculation. In addition, we
typically experience higher net revenue in the fourth quarter
due to its overlap with the semester encompassing the
traditional fall school start and in the first quarter due to
its overlap with the first semester of the calendar year. A
portion of our expenses do not vary proportionately with
fluctuations in net revenue, resulting in higher operating
income in the first and fourth quarters relative to other
quarters. We expect quarterly fluctuations in operating results
to continue as a result of these seasonal patterns.
Liquidity
and Capital Resources
Liquidity. We financed our operating
activities and capital expenditures during the years ended
December 31, 2005, 2006, and 2007 and the first nine months
of 2008 primarily through cash provided by operating activities
and several private placements of securities. Our unrestricted
cash, cash equivalents, and marketable securities were
$14.4 million, $23.2 million, and $22.2 million
at December 31, 2006 and 2007 and September 30, 2008,
respectively.
During 2007, we entered into a line of credit arrangement with a
bank for $6.0 million. As of December 31, 2007, the
entire $6.0 million was drawn. We repaid this line in full
in February 2008 and we terminated the facility in May 2008.
A significant portion of our net revenue is derived from tuition
financed by the Title IV programs. Federal regulations
dictate the timing of disbursements under the Title IV
programs. Students must apply for new loans and grants each
academic year, which starts July 1 for Title IV purposes.
Loan funds are generally provided by lenders in multiple
disbursements for each academic year. The disbursements are
usually received by the start of the second week of the
semester. These factors, together with the timing of our
students beginning their programs, affect our operating cash
flow. We believe we have a favorable working capital profile as
these Title IV funds and a significant portion of other tuition
and fees are typically received by the start of the second week
of a semester and the revenue is recognized and the related
expenses are incurred over the duration of the semester, which
reduces the impact of the growth in our accounts receivables
associated with our enrollment growth.
Based on our current level of operations and anticipated growth,
we believe that our cash flow from operations and other sources
of liquidity, including cash, and cash equivalents, will provide
adequate funds for ongoing operations, planned capital
expenditures, and working capital requirements for at least the
next 24 months.
Operating Activities. Net cash provided by
operating activities for the nine months ended
September 30, 2008 was $18.1 million. Excluding the
payment of $19.5 million that was made to our former owner
in April 2008 to satisfy in full all past royalties due under
the royalty agreement and the elimination of the existing
obligation to pay royalties for online student revenues in
perpetuity, net cash provided by operating activities for the
nine months ended September 30, 2008 would have been
$30.4 million. Net cash provided by operating activities
for the year ended December 31, 2007 was $7.1 million.
Our operating cash flows were affected by our dispute with our
former owner; as previously discussed, during 2007 we accrued
$3.8 million of royalties payable to our former owner and
funded a $3.0 million deposit in connection with a
preliminary settlement of that dispute with our former owner.
Excluding the accrual and payment to our former owner, net cash
provided by operating activities would have been
$6.3 million. Our tax payments exceeded our tax expense as
our $5.0 million of income taxes paid represented a
majority of our 2006 and 2007 tax obligations.
60
Net cash provided by operating activities for the year ended
December 31, 2006 was $6.8 million. As previously
discussed, we accrued $2.7 million of royalties payable to
our former owner during fiscal year 2006. Excluding the accrued
royalties to our former owner, net cash provided by operating
activities would have been $4.1 million. Our tax expense
exceeded our income taxes paid as a significant portion of our
income tax payable for fiscal year 2006 was paid in early 2007.
Net cash used in operating activities for the year ended
December 31, 2005 was $7.0 million which was primarily
driven by our net loss. During the period, we accrued
$1.0 million of royalties payable to our former owner.
Excluding the accrued royalties to our former owner, net cash
used in operating activities would have been $8.0 million.
Investing Activities. Net cash provided by
(used in) investing activities was $(10.0) million,
$6.7 million, and $(7.6) million for the years ended
December 31, 2005, 2006, and 2007, respectively, and $(6.1)
million for the nine months ended September 30, 2008. Our
cash used in investing activities is primarily related to the
purchase of property, plant, and equipment and leasehold
improvements. In 2005, we purchased $9.2 million of investments
related to a letter of credit required by the Department of
Education and associated with our growth restrictions. This
letter of credit was released in 2006, resulting in investment
proceeds of $9.0 million. Capital expenditures were
$0.8 million, $2.4 million and $7.4 million for
the years ended December 31, 2005, 2006, and 2007,
respectively, and $6.0 million for the nine months ended
September 30, 2008. A majority of our historical capital
expenditures are related to our ground campus in Phoenix,
Arizona. Our online business does not require significant
capital expenditures and we expect capital expenditures to
represent a decreasing percentage of net revenue in the future.
However, we will continue to invest in computer equipment and
office furniture and fixtures to support our increasing employee
headcounts.
Financing Activities. Net cash provided by
(used in) financing activities was $16.0 million,
$(1.7) million, and $9.3 million for the years ended
December 31, 2005, 2006, and 2007, respectively, and
$(13.1) million for the nine months ended
September 30, 2008. During these periods, principal
payments on notes payable, capital lease obligations and our
line of credit were offset by private placements of securities
by our stockholders and amounts drawn on our line of credit. Net
cash used in financing activities for the nine months ended
September 30, 2008 also included the $6.0 million
related to the repurchase of a warrant from our former owner
pursuant to the standstill agreement.
Contractual
Obligations
The following table sets forth, as of December 31, 2007,
the aggregate amounts of our significant contractual obligations
and commitments with definitive payment terms due in each of the
periods presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
Years
|
|
|
Years
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
2-3
|
|
|
4-5
|
|
|
5 Years
|
|
|
Long term
debt(1)
|
|
$
|
2.4
|
|
|
$
|
0.6
|
|
|
$
|
1.3
|
|
|
$
|
0.5
|
|
|
$
|
0.0
|
|
Capital lease
obligations(1)
|
|
|
52.5
|
|
|
|
3.7
|
|
|
|
7.0
|
|
|
|
6.8
|
|
|
|
35.0
|
|
Tenant improvement
obligations(1)
|
|
|
2.3
|
|
|
|
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
Operating lease
obligations(2)
|
|
|
30.4
|
|
|
|
2.2
|
|
|
|
4.2
|
|
|
|
3.7
|
|
|
|
20.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
87.6
|
|
|
$
|
6.5
|
|
|
$
|
14.8
|
|
|
$
|
11.0
|
|
|
$
|
55.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 8, Notes Payable and Capital Lease
Obligations, to our financial statements, which are
included elsewhere in this prospectus, for a discussion of our
long term debt and capital lease obligations. |
|
(2) |
|
See Note 9, Commitments and Contingencies, to
our financial statements, which are included elsewhere in this
prospectus, for a discussion of our operating lease obligations. |
61
The foregoing obligations exclude potential royalty payments to
Blanchard Education, LLC under our license agreement, the
amounts of which are contingent on tuition revenue from certain
of our business programs.
Off-Balance
Sheet Arrangements
We do not have any off-balance sheet arrangements that have or
are reasonably likely to have a material current or future
effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations,
liquidity, capital expenditures, or capital resources.
Impact of
Inflation
We believe that inflation has not had a material impact on our
results of operations for the years ended December 31,
2005, 2006, or 2007 and the nine months ended September 30,
2008. There can be no assurance that future inflation will not
have an adverse impact on our operating results and financial
condition.
Non-GAAP Discussion
In addition to our GAAP results, we use Adjusted EBITDA as a
supplemental measure of our operating performance and as part of
our compensation determinations. Adjusted EBITDA is not required
by or presented in accordance with GAAP and should not be
considered as an alternative to net income, operating income, or
any other performance measure derived in accordance with GAAP,
or as an alternative to cash flow from operating activities or
as a measure of our liquidity.
In this prospectus, Adjusted EBITDA is defined as net income
(loss) plus interest expense net of interest income, plus income
tax expense (benefit), and plus depreciation and amortization
(EBITDA), as adjusted for (i) royalty payments incurred
pursuant to an agreement with our former owner that has been
terminated as of April 15, 2008, as discussed above and in
Note 2 to our financial statements, which are included
elsewhere in this prospectus, and (ii) management fees and
expenses that are no longer paid or that will no longer be
payable following completion of this offering.
We present Adjusted EBITDA because we consider it to be an
important supplemental measure of our operating performance. We
also make certain compensation decisions based, in part, on our
operating performance, as measured by Adjusted EBITDA. See
Compensation Discussion and Analysis Impact of
Performance on Compensation. All of the adjustments made
in our calculation of Adjusted EBITDA are adjustments to items
that management does not consider to be reflective of our core
operating performance. Management considers our core operating
performance to be that which can be affected by our managers in
any particular period through their management of the resources
that affect our underlying revenue and profit generating
operations during that period. Management fees and expenses and
royalty expenses paid to our former owner are not considered
reflective of our core performance. We believe Adjusted EBITDA
allows us to compare our current operating results with
corresponding historical periods and with the operational
performance of other companies in our industry because it does
not give effect to potential differences caused by variations in
capital structures (affecting relative interest expense,
including the impact of write-offs of deferred financing costs
when companies refinance their indebtedness), tax positions
(such as the impact on periods or companies of changes in
effective tax rates or net operating losses), the book
amortization of intangibles (affecting relative amortization
expense), and other items that we do not consider reflective of
underlying operating performance. We also present Adjusted
EBITDA because we believe it is frequently used by securities
analysts, investors, and other interested parties as a measure
of performance.
In evaluating Adjusted EBITDA, you should be aware that in the
future we may incur expenses similar to the adjustments
described above. Our presentation of Adjusted EBITDA should not
be construed as an inference that our future results will be
unaffected by expenses that are unusual, non-routine, or
non-recurring. Adjusted EBITDA has limitations as an analytical
tool, and you should not consider it in isolation, or as a
substitute for analysis of our results as reported under GAAP.
Some of these limitations are that it does reflect:
|
|
|
|
|
cash expenditures for capital expenditures or contractual
commitments;
|
|
|
|
changes in, or cash requirements for, our working capital
requirements;
|
62
|
|
|
|
|
interest expense, or the cash requirements necessary to service
interest or principal payments on our indebtedness;
|
|
|
|
the cost or cash required to replace assets that are being
depreciated or amortized; and
|
|
|
|
the impact on our reported results of earnings or charges
resulting from (i) royalties to our prior owner, including
amortization of royalties prepaid in connection with our
settlement, or (ii) management fees and expenses that were
payable until completion of this offering.
|
In addition, other companies, including other companies in our
industry, may calculate these measures differently than we do,
limiting the usefulness of Adjusted EBITDA as a comparative
measure. Because of these limitations, Adjusted EBITDA should
not be considered as a substitute for net income, operating
income, or any other performance measure derived in accordance
with GAAP, or as an alternative to cash flow from operating
activities or as a measure of our liquidity. We compensate for
these limitations by relying primarily on our GAAP results and
using Adjusted EBITDA only supplementally. For more information,
see our financial statements and the notes to those statements
included elsewhere in this prospectus.
The following table presents data relating to Adjusted EBITDA,
which is a non-GAAP measure, for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
Restated(a)
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Net income (loss)
|
|
$
|
(4,286
|
)
|
|
$
|
598
|
|
|
$
|
1,526
|
|
|
$
|
521
|
|
|
$
|
4,476
|
|
Plus: interest expense net of interest income
|
|
|
2,822
|
|
|
|
1,915
|
|
|
|
1,803
|
|
|
|
1,349
|
|
|
|
1,648
|
|
Plus: income tax expense (benefit)
|
|
|
(3,440
|
)
|
|
|
529
|
|
|
|
1,016
|
|
|
|
347
|
|
|
|
2,868
|
|
Plus: depreciation and amortization
|
|
|
1,879
|
|
|
|
2,396
|
|
|
|
3,300
|
|
|
|
2,319
|
|
|
|
3,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
(3,025
|
)
|
|
|
5,438
|
|
|
|
7,645
|
|
|
|
4,536
|
|
|
|
12,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus: royalty to former
owner(b)
|
|
|
1,619
|
|
|
|
2,678
|
|
|
|
3,782
|
|
|
|
2,585
|
|
|
|
1,612
|
|
Plus: management fees and
expenses(c)
|
|
|
511
|
|
|
|
958
|
|
|
|
296
|
|
|
|
188
|
|
|
|
288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(895
|
)
|
|
$
|
9,074
|
|
|
$
|
11,723
|
|
|
$
|
7,309
|
|
|
$
|
14,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Our financial statements at December 31, 2006 and 2007 and
for each of the three years in the period ended
December 31, 2007 have been restated. See Note 3,
Restatement of Financial Statements in our financial
statements that are included elsewhere in this prospectus. |
|
(b) |
|
Reflects the royalty fee arrangement with the former owner of
Grand Canyon University in which we agreed to pay a stated
percentage of cash revenue generated by our online programs. As
a result of the settlement of a dispute with the former owner,
we are no longer obligated to pay this royalty, although the
settlement includes a prepayment of future royalties that will
be amortized in 2008 and future periods. See Note 2 to our
financial statements included with this prospectus. |
|
|
|
(c) |
|
Reflects management fees and expenses of $0.1 million,
$0.3 million, and $0.3 million for the years ended
December 31, 2005, 2006, and 2007, respectively, and
$0.2 million and $0.3 million for the nine month
periods ended September 30, 2007 and 2008, respectively, to
the general partner of Endeavour Capital, and an aggregate of
$0.4 million and $0.7 million for the years ended
December 31, 2005 and 2006, respectively, to an entity
affiliated with a former director and another affiliated with a
significant stockholder following their investment in us. The
agreements relating to these arrangements have all terminated or
will terminate by their terms upon the closing of this offering.
See Certain Relationships and Related Transactions. |
To date, we have not granted or issued any stock-based
compensation. We have adopted and implemented a stock incentive
plan pursuant to which we will periodically grant awards to our
directors, officers, employees, and other eligible participants.
Upon the consummation of this offering and pursuant to this
plan, we intend to make substantial awards to our new Chief
Executive Officer and to other employees, a significant
63
portion of which will be fully vested upon grant. As a result,
we expect to incur non-cash, stock-based compensation expenses
in future periods, including expenses of approximately
$5.9 million in the fourth quarter of 2008. Although we
believe that equity-plan related compensation will be a key
element of our employee relations and long-term incentives, we
intend to exclude it as an expense when evaluating our core
operating performance in any particular period. Accordingly,
following this offering, we intend to include stock-based
compensation expenses, along with management fees and expenses,
royalty expenses to our former owner, and any other expenses and
income that we do not consider reflective of our core operating
performance, as adjustments when calculating Adjusted EBITDA.
Quantitative
and Qualitative Disclosure About Risk
Market risk. We have no derivative financial
instruments or derivative commodity instruments. We invest cash
in excess of current operating requirements in short term
certificates of deposit and money market instruments.
Interest rate risk. We manage interest rate
risk by investing excess funds in cash equivalents and
marketable securities bearing variable interest rates, which are
tied to various market indices. Our future investment income may
fall short of expectations due to changes in interest rates or
we may suffer losses in principal if we are forced to sell
securities that have declined in market value due to changes in
interest rates. At December 31, 2007 and September 30,
2008, a 10% increase or decrease in interest rates would not
have a material impact on our future earnings, fair values, or
cash flows. All of our notes payable and capital lease
obligations are fixed rate instruments and are not subject to
fluctuations in interest rates.
Recent
Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109
(FIN 48). This interpretation, among other
things, creates a two step approach for evaluating uncertain tax
positions. Recognition (step one) occurs when an enterprise
concludes that a tax position, based solely on its technical
merits, is more-likely-than-not to be sustained upon
examination. Measurement (step two) determines the amount of
benefit that more-likely-than-not will be realized upon
settlement. Derecognition of a tax position that was previously
recognized would occur when a company subsequently determines
that a tax position no longer meets the more-likely-than-not
threshold of being sustained. FIN 48 specifically prohibits
the use of a valuation allowance as a substitute for
derecognition of tax positions, and it has expanded disclosures.
We adopted FIN 48 on January 1, 2008, and its adoption
did not have a material impact on our financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157) which provides enhanced
guidance for using fair value to measure assets and liabilities.
SFAS No. 157 establishes a common definition of fair
value, provides a framework for measuring fair value under GAAP
and expands disclosure requirements about fair value
measurements. SFAS No. 157 is effective for financial
statements issued in fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. We adopted SFAS No. 157 on January 1,
2008, and its adoption did not have a material impact on our
financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
Including an Amendment of FASB Statement No. 115
(SFAS No. 159). This standard permits
entities to choose to measure financial instruments and certain
other items at fair value and is effective for the first fiscal
year beginning after November 15, 2007.
SFAS No. 159 must be applied prospectively, and the
effect of the first re-measurement to fair value, if any, should
be reported as a cumulative - effect adjustment to the opening
balance of retained earnings. We adopted of
SFAS No. 159 on January 1, 2008 and its adoption
did not have a material impact on our financial position or
results of operations.
64
BUSINESS
Overview
We are a regionally accredited provider of online postsecondary
education services focused on offering graduate and
undergraduate degree programs in our core disciplines of
education, business, and healthcare. In addition to our online
programs, we offer ground programs at our traditional campus in
Phoenix, Arizona and onsite at the facilities of employers. We
are committed to providing an academically rigorous educational
experience with a focus on career-oriented programs that meet
the objectives of working adults. We utilize an integrated,
innovative approach to marketing, recruiting, and retaining
students, which has enabled us to increase enrollment from
approximately 3,000 students at the end of 2003 to approximately
22,000 students at September 30, 2008, representing a
compound annual growth rate of approximately 52%. At
December 31, 2007, our enrollment was approximately 14,800,
85% of our students were enrolled in our online programs, and
62% of our students were pursuing masters degrees.
Our three core disciplines of education, business, and
healthcare represent large markets with attractive employment
opportunities. According to a March 2008 report from the
U.S. Department of Education, National Center for Education
Statistics, or NCES, these disciplines ranked as three of the
four most popular fields of postsecondary education, based on
degrees conferred in the
2005-06
school year. The U.S. Department of Labor Bureau of Labor
Statistics, or BLS, estimated in its 2008-09 Career Guide that
these fields comprised over 40 million jobs in 2006, many
of which require postsecondary education credentials.
Furthermore, the BLS has projected that the education, business,
and healthcare fields will generate approximately six million
new jobs between 2006 and 2016.
We primarily focus on recruiting and educating working adults,
whom we define as students age 25 or older who are pursuing
a degree while employed. As of September 30, 2008,
approximately 92% of our online students were age 25 or
older. We believe that working adults are attracted to the
convenience and flexibility of our online programs because they
can study and interact with faculty and classmates during times
that suit their schedules. We also believe that working adults
represent an attractive student population because they are
better able to finance their education, more readily recognize
the benefits of a postsecondary degree, and have higher
persistence and completion rates than students generally.
We have experienced significant growth in enrollment, net
revenue, and operating income over the last several years. Our
enrollment at December 31, 2007 was approximately 14,800,
representing an increase of approximately 38% over our
enrollment at December 31, 2006. Our net revenue and
operating income for the year ended December 31, 2007 were
$99.3 million and $4.3 million, respectively,
representing increases of 37.7% and 42.8%, respectively, over
the year ended December 31, 2006. Our enrollment at
September 30, 2008 was approximately 22,000, representing
an increase of approximately 63% over our enrollment at
September 30, 2007. Our net revenue and operating income
for the nine months ended September 30, 2008 were
$109.6 million and $9.0 million, respectively,
representing increases of 60.1% and 305.5%, respectively, over
the nine months ended September 30, 2007. We believe our
growth is the result of a combination of factors, including our:
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focus on our core disciplines of education, business, and
healthcare;
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convenient and flexible online delivery platform targeted at
working adults;
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innovative marketing, recruitment, and retention
approach; and
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expanding portfolio of academically rigorous, career-oriented
program offerings.
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We seek to achieve continued growth in a manner that reinforces
our reputation for providing academically rigorous,
career-oriented educational programs that advance the careers of
our students. As part of our efforts to ensure that our students
graduate with the knowledge, competencies, and skills that will
enable them to succeed following graduation, we have established
an Office of Assessment and Institutional Research to monitor
student and faculty performance and improve student satisfaction.
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We have been regionally accredited by the Higher Learning
Commission and its predecessor since 1968, and we were
reaccredited in 2007 for the maximum term of ten years. We are
regulated by the Department of Education as a result of our
participation in the federal student financial aid programs
authorized by Title IV of the Higher Education Act, and, at
the state level, we are licensed to operate and offer our
programs by the Arizona State Board for Private Postsecondary
Education. In addition, we have specialized accreditations for
certain programs from the Association of Collegiate Business
Schools and Programs, the Commission on Collegiate Nursing
Education, and the Commission on Accreditation of Athletic
Training Education. We believe that our institution-wide state
authorization and regional accreditation, together with these
specialized accreditations, reflect the quality of our programs,
enhance their marketability, and improve the employability of
our graduates.
History
Grand Canyon College was founded in Prescott, Arizona in 1949 as
a traditional, private, non-profit college and moved to its
existing campus in Phoenix, Arizona in 1951. Established as a
Baptist-affiliated institution with a strong emphasis on
religious studies, the school initially focused on offering
bachelors degree programs in education. Over the years,
the school expanded its curricula to include programs in the
sciences, nursing, business, music, and arts. The college
obtained regional accreditation in 1968 from the Commission on
Institutions of Higher Education, North Central Association of
Colleges and Schools, the predecessor to the Higher Learning
Commission, and began offering nursing programs in the early
1980s and masters degree programs in education and
business in the 1980s. In 1989, it achieved university status
and became Grand Canyon University. The university introduced
its first distance learning programs in 1997, and launched its
first online programs in 2003 in business and education. In
early 2000, it discontinued its Baptist affiliation and became a
non-denominational Christian university.
In late 2003, the schools Board of Trustees initiated a
process to evaluate alternatives as a result of the
schools poor financial condition and, in February 2004,
several of our current stockholders acquired the assets of the
school and converted its operations to a for-profit institution.
In May 2005, following this change in control, the Department of
Education recertified us to continue participating in the
Title IV programs on a provisional basis, subject to
certain restrictions and requirements. In its review, the
Department of Education concluded that we did not satisfy its
standards of financial responsibility and identified other
concerns about our administrative capability. As a result, the
Department of Education required us to post a letter of credit,
accept restrictions on the growth of our program offerings and
enrollment, and receive Title IV funds under the heightened
cash monitoring system. At this time, our lead institutional
investor, Endeavour Capital, invested in us and provided the
capital to support the letter of credit requirement as well as
other working capital needs. In October 2006, based on our
significantly improved financial condition and performance, the
Department of Education eliminated the letter of credit
requirement and allowed the growth restrictions to expire. In
2007, the Department of Education eliminated the heightened cash
monitoring restrictions and returned us to the advance payment
method.
Since February 2004, we have enhanced our senior management
team, expanded our online platform, increased our program
offerings, and initiated a marketing and branding effort to
further differentiate us in the markets in which we operate. We
have also made investments to enhance our student and technology
support services. We believe these investments, combined with
our management expertise, provide a platform that will support
continued enrollment and revenue growth. Many of our ground
programs continue to include Christian study requirements. While
our online programs do not have such requirements, many include
ethics requirements and offer religious courses as electives.
Industry
Postsecondary education. The United States
market for postsecondary education represents a large and
growing opportunity. According to the March 2008 NCES report,
total revenue for all degree-granting postsecondary institutions
was over $385 billion for the
2004-05
school year. In addition, according to a September 2008 NCES
report, the number of students enrolled in postsecondary
institutions was projected to be approximately 18.0 million
in 2007 and the number was projected to grow to
18.6 million by 2010. We
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believe that future growth in this market will be driven, in
part, by an increasing number of job openings in occupations
that require bachelors or masters degrees. A
November 2007 report based on BLS data has projected the number
of such jobs to grow approximately 17% and 19%, respectively,
between 2006 and 2016, or nearly double the growth rate the BLS
projects for occupations that do not require postsecondary
degrees. Moreover, individuals with a postsecondary degree are
able to obtain a significant wage premium relative to
individuals without a degree. According to the U.S. Census
Bureau, in 2006, the median income for individuals
age 25 years or older with a bachelors or
masters degree was approximately 70% or 102% higher,
respectively, than for a high school graduate of the same age
with no college education.
According to the March 2008 NCES report, as of 2007 71% of
adults age 25 years or older did not possess a
bachelors or higher degree. In the September 2008
report, the NCES estimated that, as of 2006, adults
age 25 years or older represented 39% of total
U.S. postsecondary enrollments, or approximately
6.9 million students. We believe many of these students are
pursuing a postsecondary degree while employed in order to
increase their compensation or enhance their opportunities for
career advancement, often with their current employer. We
further believe that working adult students represent an
attractive student population because they are better able to
finance their education, more readily recognize the benefits of
a postsecondary degree, and have higher persistence and
completion rates than students generally. We expect that adults
age 25 years or older will continue to represent a
large and growing segment of the postsecondary education market.
Online postsecondary education. The market for
online postsecondary education is growing more rapidly than the
overall postsecondary market. A 2007 study by Eduventures, LLC,
an education consulting and research firm, projected that from
2002 to 2007 enrollment in online postsecondary programs
increased from approximately 0.5 million to approximately
1.8 million, representing a compound annual growth rate of
approximately 30.4%. In comparison, in September 2008 the
NCES projected a compound annual growth rate of 1.6% in
enrollment in postsecondary programs overall during the same
period. We believe this growth has been driven by a number of
factors, including the greater convenience and flexibility of
online programs as compared to ground-based programs and the
increased acceptance of online programs among academics and
employers. According to a 2006 survey by the Sloan Consortium, a
trade group focused on online education, 79.1% of chief academic
officers surveyed at institutions with 15,000 or more students,
most of which offer online programs, and 61.9% of all chief
academic officers surveyed, believe that online learning
outcomes are equal or superior to traditional face-to-face
instruction.
Education, business, and healthcare. The
education, business, and healthcare sectors represent a large
and growing market for postsecondary education. According to the
March 2008 NCES report, these fields ranked as three of the
four most popular fields of postsecondary education, based on
degrees conferred in the
2005-06
school year. We believe the popularity of these fields is driven
by the number and growth of employment opportunities. According
to its 2008-09 Career Guide, the BLS estimates that in 2006
these three fields employed more than 40 million people in
jobs that often require a postsecondary degree. Furthermore, the
BLS has projected that these sectors will generate approximately
six million incremental jobs between 2006 and 2016, not
including job openings resulting from natural attrition. We
believe there is a significant opportunity for education
providers that focus on offering students a career-focused
education in sectors of the workforce with strong job prospects,
particularly where demand for employees is growing but supply is
limited. In a 2007 report, the BLS stated that:
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Education services was the second largest industry in the United
States and accounted for approximately 13 million jobs.
Nearly half of these jobs were teaching positions that require
at least a bachelors degree, and some required a
masters or doctoral degree. The BLS projected that job
openings in the education services sector will grow by
1.4 million between 2006 and 2016 as a result of overall
population growth and a nationwide focus on improving education
and access to education.
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Management, business, and financial occupations comprised
15 million jobs across all industries. The BLS projected
that job opportunities in this field will grow 10% between 2006
and 2016, adding a total of 1.6 million jobs during that
period.
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Healthcare was the largest industry in the United States,
accounting for approximately 14 million jobs and
encompassing seven of the 20 fastest growing occupations. The
BLS projected that employment growth in the healthcare sector
will increase by 3.0 million jobs between 2006 and 2016
principally due to increased demand for healthcare services as a
result of growth in the population in older age groups, rising
life expectancy, and advances in medical technology.
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Competitive
Strengths
We believe we have the following competitive strengths:
Established presence in targeted, high demand
disciplines. We have an established presence
within our three core disciplines of education, business, and
healthcare, which, according to the March 2008 NCES report,
ranked as three of the four most popular fields of postsecondary
education, based on degrees conferred in the
2005-06
school year. We offer our students career-oriented, academically
rigorous educational programs, supported by specialized courses
within their select disciplines, which enable them to advance
their career prospects in these sectors. We seek to leverage our
historical presence in these disciplines with key branding
relationships, such as our relationship with business author and
industry leader Ken Blanchard, to differentiate our reputation
in the market place. We believe our focused approach enables us
to develop our academic reputation and brand identity within our
core disciplines, recruit and retain quality faculty and staff
members, and meet the educational and career objectives of our
students.
Focus on graduate degrees for working
adults. We have designed our program offerings
and our online delivery platform to meet the needs of working
adults, particularly those seeking graduate degrees to obtain
pay increases or job promotions that are directly tied to higher
educational attainment. We believe that working adults are
attracted to the convenience and flexibility of our online
delivery platform because they can study and interact with
faculty and classmates during times that suit their schedules.
We also believe that working adults represent an attractive
student population because they are better able to finance their
education, more readily recognize the benefits of a
postsecondary degree, and have higher persistence and completion
rates than students generally. At September 30, 2008,
approximately 60.0% of our online students were enrolled in
graduate degree programs.
Innovative marketing, recruiting, and retention
strategy. We have developed an integrated,
innovative approach to student marketing, recruitment, and
retention to reach our targeted students. We utilize Internet
marketing, seminar and event-based marketing, referrals, and
employer relationships to reach our targeted students. We
provide our enrollment counselors, who serve as our primary
contact with prospective students during the recruitment
process, with career advancement opportunities that promote
longevity and an entrepreneurial drive. We believe that our
enrollment counselors help project a consistent message
regarding our programs and increase the success rate of
converting leads to new enrollments. Finally, we have
implemented a detailed process for recruiting, enrolling, and
retaining new students through which we proactively provide
support to students at key points during their consideration of,
and enrollment at, Grand Canyon University to enhance the
probability of student enrollment and retention.
Commitment to offering academically rigorous, career-oriented
programs. We are committed to offering
academically rigorous educational programs that are designed to
help our students achieve their career objectives. Our programs
are taught by qualified faculty, substantially all of whom hold
at least a masters degree and often have practical
experience in their respective fields. We continually review and
assess our programs and faculty to ensure that our programs
provide the knowledge and skills that lead to successful student
outcomes. We provide extensive student support services,
including administrative, library, career, and technology
support services, to help maximize the success of our students.
Our Office of Assessment and Institutional Research manages our
efforts to track student and faculty performance by monitoring
student outcomes and developing transparent, measurable
outcomes-based education programs.
Complementary online capabilities and campus-based
tradition. We believe that our online
capabilities, combined with our nearly
60-year
heritage as a traditional campus-based university, differentiate
us in the for-profit postsecondary market and enhance the
reputation of our degree programs among students and employers.
Our online students benefit from our flexible, interactive
online platform, which we believe
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offers a highly effective delivery medium for our programs, yet
are enrolled in a university with a traditional campus, faculty,
facilities, and athletic programs. We require our online faculty
to undergo training in the delivery of online programs before
teaching their initial course, while our full-time ground
faculty help maintain the consistency and quality of our online
programs by supervising and conducting peer reviews of our
online faculty, and participating as subject matter experts in
the development of our online curricula. Our campus also offers
our ground students, faculty, and staff an opportunity to
participate in a traditional college experience.
Experienced executive management team with strong operating
track-record. Our executive management team
possesses extensive experience in the management and operation
of publicly-traded for-profit, postsecondary education
companies, as well as other educational services businesses,
including in the areas of marketing to, recruiting, and
retaining students pursuing online and other distance education
degree offerings. Our Executive Chairman and former Chief
Executive Officer, Brent Richardson, has worked in the
education services sector for more than 20 years and has
extensive experience in content development and prospective
student identification and recruitment. Dr. Kathy Player,
our President, has been with Grand Canyon University for
10 years, has played a key role in developing our
reputation for academic rigor and quality, and has been
instrumental in developing our Office of Assessment and
Institutional Research.
Effective July 1, 2008, we hired Brian Mueller, Stan Meyer,
and Dan Bachus to serve as our Chief Executive Officer,
Executive Vice President, and Chief Financial Officer,
respectively. Mr. Mueller has been involved in the
education industry for over 25 years, most recently as the
president of Apollo Group, Inc., a for-profit, postsecondary
education company and the parent company of the University of
Phoenix. Mr. Meyer, who also has over 25 years of
experience in the education industry, most recently served as
the executive vice president of marketing and enrollment for
Apollo Group, Inc. Mr. Bachus, who is a certified public
accountant, has worked in the education industry for
approximately seven years, including as the chief
accounting officer and controller for Apollo Group, Inc.
Growth
Strategies
We intend to pursue the following growth strategies:
Increase enrollment in existing programs. We
continue to increase enrollment in our three core disciplines by
identifying, enrolling, and retaining students seeking careers
in the education, business, and healthcare fields. We believe,
due to the depth of the market in our core disciplines, that our
existing programs, some of which were only recently launched,
provide ample opportunity for growth. Our three core disciplines
serve markets that currently comprise over 40 million jobs,
many of which require postsecondary education, and the BLS has
projected in its 2008-09 Career Guide that these sectors will
continue to grow. In 2007, we increased the number of our
enrollment counselors by over 200 to increase our efforts to
enroll prospective students in these fields. We intend to
continue to increase the number of our enrollment counselors and
our marketing personnel, and to provide these individuals with
the training and resources necessary to effectively and
efficiently drive enrollment growth and student retention.
Expand online program and degree offerings. We
develop and offer new programs that we believe have attractive
demand characteristics. We launched 17 new online program
offerings in 2007, including the Ken Blanchard Executive MBA
program, and twelve new online programs in the first nine months
of 2008, including our first doctoral degree program, a
Doctorate of Education in Organizational Leadership. Our new
program offerings typically build on existing programs and
incorporate additional specialized courses, which offers our
students the opportunity to pursue programs that address their
specific educational objectives while allowing us to expand our
program offerings with only modest incremental investment. We
also seek to add new programs in additional targeted
disciplines, such as our recently launched programs in
psychology and digital media.
Further enhance our brand recognition. We
continue to enhance our brand recognition by pursuing online and
offline marketing campaigns, establishing strategic branding
relationships with recognized industry leaders, and developing
complementary resources in our core disciplines that increase
the overall awareness of our offerings. In our marketing
efforts, we emphasize the academic rigor and career orientation
of our programs.
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We seek to promote our brand by establishing relationships with
industry leaders, such as Ken Blanchard, who have recognizable
identities with potential students and further validate the
quality and relevance of our program offerings.
Expand relationships with private sector and government
employers. We seek additional relationships with
health care systems, school districts, emergency services
providers, and other employers through which we can market our
offerings to their employees. As evidence of our success in
these initiatives to date, in the first nine months of 2008, we
taught courses at 29 hospitals and had direct billing
arrangements with 28 employers covering programs being pursued
by approximately 2,100 of their employees. We recently
established a national account sales team, consisting of
professionals with significant sales and marketing experience,
that seeks to develop strategic relationships on a regional,
national, and international basis across a wide range of
employers. These relationships provide leads for our programs,
build our recognition among employers in our core disciplines,
and enable us to identify new programs and degrees that are in
demand by students and employers.
Leverage infrastructure and drive earnings
growth. We have made significant investments in
our people, processes, and technology infrastructure since 2004.
We believe these investments have prepared us to deliver our
academic programs to a much larger student population with only
modest incremental investment. Our current infrastructure is
capable of supporting a significantly larger number of
enrollment counselors, and we intend to expand this group in
order to continue to drive enrollment growth. We implemented a
new learning management system in 2007 to better serve the
demands of our growing student population and have expanded our
student and technology support capabilities to support a larger
student base. We have also invested in administrative and
management personnel and systems to prepare for our anticipated
growth. We intend to leverage our historical investments as we
increase our enrollment, which we believe will allow us to
increase our operating margins over time.
Our
Approach to Academic Quality
Some of the key elements that we focus on to promote a high
level of academic quality include:
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Academically rigorous, career oriented
curricula. We create academically rigorous
curricula that are designed to enable all students to gain the
foundational knowledge, professional competencies, and
demonstrable skills required to be successful in their chosen
fields. Our curriculum is designed and delivered by faculty that
are committed to delivering a high quality, rigorous education.
We design our curricula to address specific career-oriented
objectives that we believe working adult students in the
disciplines we serve are seeking. Through this combination, we
believe that we produce graduates that can compete and become
leaders in their chosen fields.
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Qualified faculty. We demonstrate our
commitment to high quality education by hiring and contracting
qualified faculty with relevant practical experience.
Substantially all of our current faculty members hold at least a
masters degree in their respective field and approximately
29% of our faculty members hold a doctoral degree. Many of our
faculty members are able to integrate relevant, practical
experiences from their professional careers into the courses
they teach. We invest in the professional development of our
faculty members by providing training in ground and online
teaching techniques, hosting events and discussion forums that
foster sharing of best practices, and continually assessing
teaching effectiveness through peer reviews and student
evaluations.
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Standardized course design. We employ a
standardized curriculum development process to ensure a
consistent learning experience with frequent faculty-student
interaction in our courses. We thereafter continuously review
our programs in an effort to ensure that they remain consistent,
up-to-date,
and effective in producing the desired learning outcomes. We
also regularly review student surveys to identify opportunities
for course modifications and upgrades.
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Effective student services. We establish teams
comprised of academic and administrative personnel that act as
the primary support contact point for each of our students,
beginning at the application stage and continuing through
graduation. In recent years, we have also concentrated on
improving the technology used to support student learning,
including enhancing our online
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learning platform and further improving student services through
the implementation of online interfaces. As a result, many of
our support services, including academic, administrative,
library, and career services, are accessible online, generally
allowing users to access these services at a time and in a
manner that is generally convenient to them.
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Continual academic oversight. We have
centralized the academic oversight and assessment functions for
all of our programs through our Office of Assessment and
Institutional Research, which continuously evaluates the
academic content, delivery method, faculty performance, and
desired learning outcomes for each of our programs. We
continuously assess outcomes data to determine whether our
students graduate with the knowledge, competencies, and skills
that are necessary to succeed in the workplace. The Office and
Assessment and Institutional Research also initiates and manages
periodic examinations of our curricula by internal and external
reviewers to evaluate and verify program quality and workplace
applicability. Based on these processes and student feedback, we
determine whether to modify or discontinue programs that do not
meet our standards or market needs, or to create new programs.
The Office and Assessment and Institutional Research also
oversees regular reviews of our programs conducted by
accrediting commissions.
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We also offer, for both our online and ground programs, the
following features in an effort to enrich the academic
experience of current and prospective students:
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Flexibility in program delivery. We also seek
to meet market demands by providing students with the
flexibility to take courses exclusively online or to combine
online coursework with various campus and onsite options. For
example, based on market demand, particularly in connection with
our nursing programs, we have established satellite locations at
multiple hospitals that allow nursing students to take clinical
courses onsite while completing other course work online. We
have established similar onsite arrangements with other major
employers, including schools and school districts through which
students can pursue student teaching opportunities. This
flexibility raises our profile among employers, encourages
students to take and complete courses and eliminates
inconveniences that tend to lessen student persistence.
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Small class size. At September 30, 2008,
over 90% of our online classes had 25 or fewer students, with no
classes exceeding 40 students, and over 80% of our ground
classes had 25 or fewer students. These class sizes provide each
student with the opportunity to interact directly with course
faculty and to receive individualized feedback and attention
while also affording our faculty with the opportunity to engage
proactively with a manageable number of students. We believe
this interaction enhances the academic quality of our programs
by promoting opportunities for students to participate actively
and thus build the requisite knowledge, competencies, and skills.
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Accreditation
and Program Approvals
We believe that the quality of our academic programs is
evidenced by the college- and program-specific accreditations
and approvals that we have pursued and obtained. Grand Canyon
University has been continually accredited by the Higher
Learning Commission and its predecessor since 1968, obtaining
its most recent
ten-year
reaccreditation in 2007. We are licensed in Arizona by the
Arizona State Board for Private Postsecondary Education. In
addition, we have obtained the following specialized
accreditations and approvals for our core program offerings:
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College
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Specialized Accreditations and Program Approvals
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Current Period
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College of Education
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The Arizona State Board of Education
approves our College of Education to offer Institutional
Recommendations for the certification of elementary, secondary,
and special education teachers and school administrators.
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2008 - 2010
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Ken Blanchard College of Business
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The Association of Collegiate Business
Schools and Programs accredits our Master of Business
Administration degree program and our Bachelor of Science degree
programs in Accounting, Business Administration, and Marketing.
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2007 - 2017
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College of Nursing and Health Sciences
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The Commission on Collegiate Nursing
Education accredits our Bachelor of Science (B.S.) in Nursing
and Master of Science (M.S.) Nursing degree programs.
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2006 - 2016 (B.S.)
2006 - 2011 (M.S.)
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The Arizona State Board of Nursing
approves our Bachelor of Science (B.S.) in Nursing and Master of
Science (M.S.) Nursing degree programs.
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2006 - 2016 (B.S.)
2006 - 2011 (M.S.)
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The Commission on Accreditation of
Athletic Training Education accredits our Athletic Training
Program.
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2008 - 2013
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Our regional accreditation with the Higher Learning Commission,
and our specialized accreditations and approvals for our core
programs, reflect the quality of, and standards we set for, our
programs, enhance their marketability, and improve the
employability of our graduates.
Curricula
We offer the degrees of Master of Arts in Teaching, Master of
Education, Master of Business Administration, Master of Science,
Bachelor of Arts, and Bachelor of Science and a variety of
programs leading to each of these degrees. Many of our degree
programs also offer the opportunity to obtain one or more
emphases. We require students to take a minimum of three
designated courses to achieve a given emphasis. We also offer
certificate programs, which consist of a series of courses
focused on a particular area of study, for students who seek to
enhance their skills and knowledge. In addition, we began
offering our first doctoral degree program, a Doctorate of
Education in Organizational Leadership, in May 2008.
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We offer our academic programs through our four distinct
colleges:
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the College of Education, which has a nearly
60-year
history as one of Arizonas leading teachers colleges
and consistently graduates teachers who meet or exceed state
averages on the Arizona Educator Proficiency Assessment exams;
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the Ken Blanchard College of Business, which has a well-known
brand among our target student population, an advisory board
that includes nationally recognized business leaders, and a
reputation for offering career-oriented degree programs,
including an Executive MBA and programs in leadership,
innovation, and entrepreneurship;
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the College of Nursing and Health Sciences, which has a strong
reputation within the Arizona healthcare community and is the
second largest nursing program in Arizona; and
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the College of Liberal Arts, which develops and provides many of
the general education course requirements in our other colleges
and also serves as one of the vehicles through which we offer
programs in additional targeted disciplines.
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We license the right to utilize the name of Ken Blanchard in
connection with our business school and Executive MBA Programs.
See Intellectual Property.
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Under the overall leadership of our senior academic affairs
personnel and the deans of the individual colleges, each of the
colleges organizes its academic programs through various
departments and schools. At December 31, 2007, we offered
82 academic degree programs and emphases, as follows:
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College of Education
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Ken Blanchard College of Business
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Degree Program
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Emphasis
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Degree Program
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Emphasis
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Master of Arts in Teaching
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Ken Blanchard Executive MBA
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Master of Education
Bachelor of Science
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Education Administration
Institutional Recommendation (IR)
Education Administration
Organizational Leadership
Education Administration
School Leadership
Elementary Education IR
Elementary Education
Non-IR
Curriculum and Instruction: Reading
Curriculum and Instruction:
Technology
Secondary Education IR
Secondary Education Non-IR
Special Education for Certified Special
Educators
Teaching English to Speakers of Other
Languages
Special Education IR
Special Education Non-IR
School Counseling K-12*
Elementary/Special Education*
Elementary Education Early
Childhood Education
Elementary Education
English
Elementary Education
Math
Elementary Education
Science
Secondary Education
Biology*
Secondary Education
Business Education
and Technology
Secondary Education
Chemistry*
Secondary Education
Mathematics
Secondary Education
Social Studies
Secondary Education
Physical Education
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Master of Business Administration
Master of Science
Bachelor of Science
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General Management
Health Systems Management
Leadership
Management of Information Systems
Marketing
Six Sigma
Leadership
Leadership Disaster Preparedness
Crisis Management
Executive Fire Leadership
Accounting
Business Administration
Business Administration
Healthcare Management
Business Administration
Management of Information Systems Marketing
Applied
Management Accounting
Finance
Entrepreneurial Studies
Public Safety Administration
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Bachelor of Arts
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English for Secondary Teachers*
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*
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Indicates program was offered on
ground only.
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74
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College of Nursing and Health Sciences
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College of Liberal Arts
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Degree Program
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Emphasis
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Degree Program
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Emphasis
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Master of Science Nursing
Bachelor of Science in Nursing
Bachelor of Science
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Family Nurse Practitioner*
Nursing Leadership in Healthcare
Systems
Clinical Nurse Specialist*
Clinical Nurse Specialist (Education
Focus)*
Nursing Education
Biology Basic Science*
Biology Pre-Medicine*
Biology Pre-Pharmacy*
Biology Pre-Physician
Assistant*
Biology Pre-Physical Therapy*
Biology Pre-Occupational
Therapy*
Biology Pre-Veterinary*
Health Science: Professional Development
and Advanced Patient Care
Medical Imaging Sciences
Athletic Training*
Corporate Fitness and Wellness*
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Bachelor of Arts in History*
Bachelor of Science
Bachelor of Arts
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Justice Studies*
Psychology
Sociology*
Communications Digital Media*
Communications Graphic Design*
Communications Public
Relations*
English Literature*
Interdisciplinary Studies
Communication
Christian Leadership
Intercultural Studies
Christian Studies
Biblical/Theological Studies
Christian Studies Pastoral
Ministry
Christian Studies Worship
Ministry
Christian Studies Youth
Ministry
Christian Leadership
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Physical Education*
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Recreation*
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Undergraduate Minors
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Athletic Coaching*
Behavioral Sciences* Business
Critical Thinking and Expression*
Exercise Science* Family Studies Health Education* History*
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Justice Studies*
Physical Education*
Political Science*
Psychology*
Recreation*
Social Sciences*
Sociology*
Spanish*
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*
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Indicates program was offered on
ground only.
|
We have established relationships with health care systems,
school districts, emergency services providers, and other
employers through which we offer programs onsite to provide
flexibility and convenience to students and their employers. For
example, for our nursing programs, we offer clinical courses
onsite at hospitals and other healthcare centers with which we
have relationships, and also arrange to allow these students to
complete their clinical work onsite. We refer to students
attending a program with us through such relationships as
professional studies ground students.
We offer our programs through three 16-week semesters in a
calender year, with two starts available per semester for our
online students and our professional studies ground students and
one start available per semester for our traditional ground
students. During each semester, classes may last for five,
eight, or 16 weeks. Depending on the program, students generally
enroll in one to three courses per semester. We require online
students to complete two courses of three credits hours each
during a 16-week semester, with each student concentrating on
one course during each eight-week period. While there is no
explicit requirement, we communicate to our online students our
expectation that they access their online student classroom at
least four times each week in order to maintain an active
dialogue with their professors and classmates. Our online
programs provide a digital record of student interactions for
the course instructor to assess students levels of
engagement and demonstration of required competencies.
New
Program Development
We typically identify a potential new degree program or emphasis
area through market demand or from proposals developed by
faculty, staff, students, alumni, or partners, and then perform
an analysis of the
75
development cost and the long-term demand for the program. If,
following this analysis, we decide to proceed with the program,
our Curriculum Design and Development Team designates a subject
matter expert who works with other faculty and our curriculum
development personnel to design a program that is consistent
with our academically rigorous, career-oriented program
standards. The program is then reviewed by the dean of the
applicable college, the Academic Affairs Committee, our
President, and our provost and chief academic officer and,
finally, presented for approval to our Program Standards and
Evaluation Committee. Upon approval, the subject matter expert
develops a course syllabus and our Marketing Department creates
a marketing plan to publicize the new program. Our average
program development process is six months from proposal to
course introduction. The development process is typically longer
if we are expanding into a new field or offering a new type of
degree.
Assessment
In 2007, we established our Office of Assessment and
Institutional Research to serve as our central resource for
assessing and continually improving our curricula, student
satisfaction and learning outcomes, and overall institutional
effectiveness. Among other things, the assessment team reviews
student course satisfaction surveys, analyzes archived student
assignments to assess whether a given program is developing
students foundational knowledge, professional
competencies, and skills to achieve the expected learning
outcomes, supervises and analyzes faculty peer reviews, and
monitors program enrollment and retention data. Based on this
data and the conclusions of the assessment team, we modify
programs as necessary to meet our student satisfaction and
educational development standards and make recommendations as to
adding or modifying programs.
Faculty
Our faculty includes full-time, ground-based faculty who teach
under a nine-month or twelve-month teaching contract, as well as
adjunct ground-based faculty and online faculty who we contract
to teach on a
course-by-course
basis for a specified fee. As of September 30, 2008, we
employed 460 ground-based faculty members, of which 53 were
full-time and 407 were part-time adjuncts, and maintained a pool
of over 1,000 online faculty members, all of whom had completed
our required training and 656 of which taught at least one
course during the first nine months of 2008. Substantially all
of our current faculty members hold at least a masters
degree in their respective field and approximately 29% of our
faculty members hold a doctoral degree. On occasion, we engage a
limited number of faculty members who may not hold a graduate
degree, but who evidence significant professional experience and
achievement in their respective subject areas.
We establish full-time, adjunct and online positions based on
program and course enrollment. As enrollment increases, we
expect to continue to increase our online faculty pool. We
manage faculty workload by limiting our faculty to a maximum of
four courses per semester and by restricting the number of
students per class.
We attract faculty through referrals by current faculty members
and advertisements in education and trade association journals,
as well as from direct inquiries through our website. We require
each new online faculty member to complete an online orientation
and training program that leads to certification and assignment.
We believe that potential faculty members are attracted to us
because of the opportunity to teach academically rigorous,
career-oriented material to motivated working adult students.
We believe that the quality of our faculty is critical to our
success, particularly because faculty members have more
interaction with our students than any other university
employee. Accordingly, we regularly review the performance of
our faculty, including by engaging our full-time ground faculty
and other specialists to conduct peer reviews of our online
faculty, monitoring the amount of contact that faculty have with
students in our online programs, reviewing student feedback, and
evaluating the learning outcomes achieved by students. If we
determine that a faculty member is not performing at the level
that we require, we work with the faculty member to improve
performance, including by assigning him or her a mentor or
through other means. If the faculty members performance
does not improve, we terminate the faculty members
contract or employment.
76
Student
Support Services
Encouraging students that enter Grand Canyon University to
complete their degree programs is critical to the success of our
business. We focus on developing and providing resources that
support the student educational experience, simplify the student
enrollment process, acclimate students to our programs and our
online environment, and track student performance toward degree
completion. Many of our support services, including academic,
administrative, and library services, are accessible online and
are available to our online and ground students, allowing users
to access these services at a time and in a manner that is
generally convenient to them. The student support services we
provide include:
Academic services. We provide students with a
variety of services designed to support their academic studies.
Our Center for Academic and Professional Success offers new
student orientation, academic advising, technical support,
research services, writing services, and other tutoring to all
our online and campus students.
Administrative services. We provide students
with the ability to access a variety of administrative services
both telephonically and via the Internet. For example, students
can register for classes, apply for financial aid, pay their
tuition and access their transcripts online. We believe this
online accessibility provides the convenience and self-service
capabilities that our students value. Our financial aid
counselors provide personalized online and telephonic support to
our students.
Library services. We provide a mix of online
and ground resources, services, and instruction to support the
educational and research endeavors of all students, faculty, and
staff, including ground and online libraries and a qualified
library staff that is available to help faculty and students
with research, teaching, and library resource instruction.
Collectively, our library services satisfy the criteria
established by the Higher Learning Commission and other
accrediting and approving bodies for us to offer undergraduate,
masters and doctoral programs.
Career services. For those students seeking to
change careers or explore new career opportunities, we offer
career services support, including resume review and evaluation,
career planning workshops, and access to career services
specialists for advice and support. Other resources that we
offer include a Job Readiness Program, which advises students on
matters such as people skills, resumes and cover letters, mock
interviews, and business etiquette; a job board, which
advertises employment postings and career exploration
opportunities; career counseling appointments and consultations;
and career fairs.
Technology support services. We provide online
technical support 16 hours per day during the week and
14 hours per day on weekends to help our students remedy
technology-related issues. We also provide online tutorials and
Frequently Asked Questions for students who are new
to online coursework.
Marketing,
Recruitment, and Retention
Marketing. We engage in a range of marketing
activities designed to position us as a provider of academically
rigorous, career-oriented educational programs, build strong
brand recognition in our core disciplines, differentiate us from
other educational providers, raise awareness among prospective
students, generate enrollment inquiries, and stimulate student
and alumni referrals. Our online target market includes working
adults focused on program quality, convenience, and career
advancement goals. Our ground target market includes traditional
college students, working adults seeking a high quality
education in a traditional college setting, and working adults
seeking to take classes with a cohort onsite at their
employers facility. In marketing our programs to
prospective students, we emphasize the value of the educational
experience and the academic rigor and career orientation of the
programs, rather than the cost or speed to graduation. We
believe this approach reinforces the qualities that we want
associated with our brand and also attracts students who tend to
be more persistent in starting and finishing their programs.
We have established dedicated teams, consisting of both
marketing and enrollment personnel, at each of our colleges to
lead our efforts to attract new students. We believe that these
blended groups, organized around each core discipline, promote
more effective internal communication within our sales and
marketing functions, allow deeper penetration within our target
markets due to each teams singular focus on a core
discipline, and
77
enable us to gain a better understanding of the attributes of
our students who ultimately enroll and graduate so that we can
target our marketing and enrollment processes accordingly.
To generate student leads, our marketing and enrollment
personnel employ an integrated marketing approach that utilizes
a variety of lead sources to identify prospective students.
These lead generation sources include:
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Internet and affiliate advertising, which generates the majority
of our leads and which includes purchasing leads from
aggregators and also engaging in targeted, direct email
advertising campaigns, and coordinated campaigns with various
affiliates;
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search engine optimization techniques, through which we seek to
obtain high placement in search engine results in response to
key topic and word searches and drive traffic to our website;
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seminar and event marketing, in which our marketing and
enrollment personnel host group events at various venues,
including community colleges, corporations, and hospitals;
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referrals from existing students, alumni, and employees;
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a national accounts program that seeks to develop relationships
with employers in our core disciplines, including healthcare
providers, school districts, emergency services providers, and
large corporations, that may be interested in providing
dedicated and customized online and onsite educational
opportunities to their employees, and to encourage senior
executives to participate in executive training
programs; and
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print and direct mail advertising campaigns, and other public
relations and communications efforts, including promoting our
athletic programs and student and alumni events.
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Recruitment. Once a prospective student has
indicated an interest in enrolling in one of our programs, our
lead management system identifies and directs an enrollment
counselor to initiate immediate communication. The enrollment
counselor serves as the primary, direct contact for the
prospective student and the counselors goal is to help
that individual gain sufficient knowledge and understanding of
our programs so that he or she can assess whether there is a
good match between our offerings and the prospective
students goals. Upon the prospective students
submission of an application, the enrollment counselor, together
with our student services personnel, works with the applicant to
gain acceptance, arrange financial aid, if needed, register for
courses, and prepare for matriculation.
Our enrollment counselors typically have prior education
industry or sales experience. Each counselor undergoes a
standardized three-week training program that involves both
classroom and supervisor-monitored fieldwork and provides the
counselor with training in financial aid, regulatory
requirements, general sales skills, and our history and
heritage, mission, and academic programs. As of
September 30, 2008, we employed over 550 enrollment
counselors at facilities in Arizona and Utah and have capacity
at our existing locations to support approximately 700
enrollment counselors, which we expect to be sufficient to
handle our growth plans through 2009. We believe we can obtain
additional capacity to accommodate our growth plans beyond 2009
on terms acceptable to us and have plans to add up to three
additional facilities during the next six months.
Retention. We employ a retention team whose
purpose is to support the student in advancing from
matriculation through graduation. The retention team members,
among other things, monitor triggering events, such
as the failure to buy books for a registered course or to
participate in online orientation exercises, which signal that a
student may be at-risk for dropping out. Upon identifying an
at-risk student, specialists proactively interact with the
student to resolve any issues and encourage the student to
continue with his or her program. In 2006, we developed and
introduced our concierge system, which is a software
program that monitors and manages the resolution of student
issues, such as financial aid or technology problems, that, if
left unresolved, may lead to dissatisfaction and lower student
persistence. Under this system, each reported problem is issued
a ticket that is accessible by all functional groups
within Grand Canyon University and remains outstanding until the
problem is resolved. The system directs the ticket to personnel
best able to resolve the problem, and escalates the ticket to
higher levels if not resolved within appropriate time periods.
We have found that personally involving our employees in the
student educational process, and proactively seeking to resolve
issues before they become larger problems, can significantly
increase retention
78
rates among students. The concierge system also provides our
marketing and enrollment personnel with greater insight into the
qualities exhibited by successful students, which enables our
enrollment team to recruit and enroll higher quality applicants.
Admissions
Admission is available to qualified students who are at least
16 years of age. Applicants to our graduate programs must
generally have an undergraduate degree from an accredited
college, university, or program with a grade point average of
2.8 or greater, or a graduate degree from such a college,
university, or program. Undergraduate applicants may qualify in
various ways, including by having a high school diploma and an
unweighted grade point average of 2.25 or greater or a composite
score of 920 or greater on the Scholastic Aptitude Test, or a
passing score of 520 or greater on the General Education
Development (GED) tests. Some of our programs require a higher
grade point average
and/or other
criteria to qualify for admission. In addition, some students
who do not meet the qualifications for admission may be admitted
at our discretion. A student being considered for admission with
specification may be asked to submit additional information such
as personal references and an essay addressing academic history.
Students may also need to schedule an interview to help clarify
academic goals and help us make an informed decision.
Enrollment
At September 30, 2008, we had 21,957 students enrolled
in our courses, of which 19,287, or 87.8%, were enrolled in our
online programs, and 2,670, or 12.2%, were enrolled in our
ground programs. Of our online students, which were
geographically distributed throughout all 50 states of the
United States, and Canada, 91.6% were age 25 or older. Of
our ground students, which, although we draw students from
throughout the United States, were predominantly comprised of
students from Arizona, 63.0% were age 25 or older.
The following is a summary of our student enrollment at
September 30, 2008 and December 31, 2007 (which
included less than 100 students pursuing non-degree
certificates) by degree type and by instructional delivery
method:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
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|
|
December 31, 2007
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|
|
|
# of Students
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|
|
% of Total
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|
|
# of Students
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|
|
% of Total
|
|
|
Masters
|
|
|
12,286
|
|
|
|
56
|
.0
|
|
|
|
9,156
|
|
|
|
62
|
.1
|
%
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Bachelors
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|
|
9,671
|
|
|
|
44
|
.0
|
|
|
|
5,598
|
|
|
|
37
|
.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
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|
21,957
|
|
|
|
100
|
.0
|
|
|
|
14,754
|
|
|
|
100
|
.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
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|
December 31, 2007
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|
|
# of Students
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|
|
% of Total
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|
|
# of Students
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|
|
% of Total
|
|
Online
|
|
|
19,287
|
|
|
|
87
|
.8
|
|
|
|
12,497
|
|
|
|
84
|
.7
|
%
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Ground*
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|
2,670
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|
|
|
12
|
.2
|
|
|
|
2,257
|
|
|
|
15
|
.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
21,957
|
|
|
|
100
|
.0
|
|
|
|
14,754
|
|
|
|
100
|
.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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*
|
|
Includes our traditional ground
students, as well as our professional studies ground students.
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Tuition
and Fees
Our tuition rates vary by type and length of program and by
degree level. For all graduate and undergraduate programs,
tuition is determined by the number of courses taken by each
student. For our
2008-09
academic year (the academic year that began in May 2008), our
prices per credit hour are $395 for undergraduate online and
professional studies courses, $420 for graduate online courses
(other than graduate nursing), $510 for graduate online nursing
courses, and $645 for undergraduate courses for ground students.
The overall price of each course varies based upon the number of
credit hours per course (with most courses representing three
credit hours), the degree level of the program, and the
discipline of the course. In addition, we charge a fixed $7,740
block tuition for undergraduate ground students
taking between 12 and 18 credit
79
hours per semester, with an additional $645 per credit hour for
credits in excess of 18. A traditional undergraduate degree
typically requires a minimum of 120 credit hours. The minimum
number of credit hours required for a masters degree and
overall cost for such a degree varies by program although such
programs typically require approximately 36 credit hours. Our
new doctoral program in education, which is first being offered
in the 2008-09 academic year, costs $770 per credit hour and
requires approximately 60 credit hours.
We offer tuition scholarships to select students, including
online students, athletes, employees, and participants in
programs we offer through relationships with employers. For the
years ended December 31, 2006 and 2007 and the nine months
ended September 30, 2008, our revenue was reduced by
approximately $8.0 million, $10.3 million, and
$11.9 million, respectively, as a result of scholarships
that we offered to our students.
We have established a refund policy for tuition and fees based
upon semester start dates. If a student drops or withdraws from
a course during the first week of the semester, 100% of the
charges for tuition and fees are refunded, while during the
second and third weeks of a semester 75% and 50%, respectively,
of the tuition charges are refunded but none of the fees.
Following the third week of the semester, tuition and fees are
not refunded. Fees charged by us include application and
graduation fees of $100 and $150, respectively, as well as fees
for dropping or withdrawing from courses after the beginning of
the semester. This tuition and fees refund policy is different
from, and applies in addition to, the return of Title IV
funds policy we are required to use as a condition of our
participation in the Title IV programs.
Sources
of Student Financing
Our students finance their education through a combination of
methods, as follows:
Title IV programs. The federal government
provides for grants and loans to students under the
Title IV programs, and students can use those funds at any
institution that has been certified as eligible by the
Department of Education. Student financial aid under the
Title IV programs is primarily awarded on the basis of a
students financial need, which is generally defined as the
difference between the cost of attending the institution and the
amount the student and the students family can reasonably
contribute to that cost. All students receiving Title IV
program funds must maintain satisfactory academic progress
toward completion of their program of study. In addition, each
school must ensure that Title IV program funds are properly
accounted for and disbursed in the correct amounts to eligible
students.
During fiscal 2007, we derived approximately 74.0% of our
revenue (calculated on a cash basis in accordance with
Department of Education standards) from tuition financed under
the Title IV programs. The primary Title IV programs
that our students receive funding from are the Federal Family
Education Loan, or FFEL, Program, and the Federal Pell Grant, or
Pell, Program, which are described below:
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FFEL. Under the FFEL Program, banks and other
lending institutions make loans to students. The FFEL Program
includes the Federal Stafford Loan Program, the Federal PLUS
Program (which provides loans to graduate and professional
studies students as well as parents of dependent undergraduate
students), and the Federal Consolidation Loan Program. If a
student defaults on an FFEL loan, payment to the lender is
guaranteed by a federally recognized guaranty agency, which is
then reimbursed by the Department of Education. Students who
demonstrate financial need may qualify for a subsidized Stafford
loan. With a subsidized Stafford loan, the federal government
pays the interest on the loan while the student is in school and
during grace periods and any approved periods of deferment,
until the students obligation to repay the loan begins.
Unsubsidized Stafford loans are not based on financial need, and
are available to students who do not qualify for a subsidized
Stafford loan or, in some cases, in addition to a subsidized
Stafford loan. Loan funds are disbursed to us, and we in turn
disburse the amounts in excess of tuition and fees to students.
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Effective July 1, 2008, under the Federal Stafford Loan
Program, a dependent undergraduate student can borrow up to
$5,500 for the first academic year, $6,500 for the second
academic year, and $7,500 for each of the third and fourth
academic years. Students classified as independent,
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and dependent students whose parents were denied a parent loan
for undergraduate students, can obtain up to an additional
$4,000 for each of the first and second academic years and an
additional $5,000 for each of the third and fourth academic
years. Students enrolled in graduate programs can borrow up to
$20,500 per academic year. Students enrolled in certain
graduate-level health programs can receive an additional $12,500
per academic year.
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Pell. Under the Pell Program, the Department
of Education makes grants to undergraduate students who
demonstrate financial need. Effective July 1, 2008, the
maximum annual grant a student can receive under the Pell
Program is $4,731. Under the August 2008 reauthorization of the
Higher Education Act, students will be able for the first time
to receive Pell Grant funds for attendance on a year-round
basis, which means that the amount a student can receive in a
given year will be more than the traditionally defined maximum
annual amount.
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Our students also receive funding under other Title IV
programs, including the Federal Perkins Loan Program, the
Federal Supplemental Educational Opportunity Grant Program, the
Federal Work-Study Program, the National Science and Mathematics
Access to Retain Talent Grant Program, and the Academic
Competitiveness Grant Program. We have been approved by the
Department of Education to participate in the Federal Direct
Loan Program, under which the Department of Education rather
than a private lender makes the loans to students, and we are
prepared for our students to begin receiving loans under that
program if we determine that such lending is necessary to
continue our students access to Title IV loans. The
types of loans, the maximum annual loan amounts and other terms
of the loans made under the Federal Direct Loan Program are
similar to those for loans made under the FFEL Program.
Other financial aid programs. In addition to
the Title IV programs listed above, eligible students may
participate in several other financial aid programs or receive
support from other governmental sources. These include veterans
educational benefits administered by the U.S. Department of
Veterans Affairs and state financial aid programs. During fiscal
2007 and the first nine months of 2008, we derived an immaterial
amount of our net revenue from tuition financed by such programs.
Private loans. Some of our students also use
private loan programs to help finance their education. Students
can apply to a number of different lenders for private loans at
current market interest rates. Private loans are intended to
fund a portion of students cost of education not covered
by the Title IV programs and other financial aid. During
fiscal 2007, payments derived from private loans constituted
approximately 5.1% of our cash revenue. Third-party lenders
independently determine whether a loan to a student is
classified as subprime, and, based on these determinations,
payments to us derived from subprime loans constituted
approximately 0.2% of our cash revenue.
Other sources. We derived the remainder of our
net revenue from tuition that is self-funded or attributable to
employer tuition reimbursements.
Technology
Systems and Management
We believe that we have established a secure, reliable, scalable
technology system that provides a high quality online
educational environmental and gives us the capability to
substantially grow our online programs and enrollment.
Online course delivery and management. In
2007, we implemented the ANGEL Learning Management Suite, which
is a web-based system and collaboration portal that stores,
manages, and delivers course content; provides interactive
communication between students and faculty; enables assignment
uploading; and supplies online evaluation tools. The system also
provides centralized administration features that support the
implementation of policies for content format and in-classroom
learning tools. We continually seek to develop and implement
features that enhance the online classroom experience, such as
delivering course content through streaming video, which we
began for selected courses in the fall of 2008.
Internal administration. We utilize a
commercial customer relations management package to distribute,
manage, track, and report on all prospective student leads
developed, both internally and externally. We also utilize a
commercial software package to track Title IV funds,
student records, grades, accounts receivable,
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and accounts payable. Each of these packages is scalable to
capacity levels well in excess of current requirements.
Infrastructure. We operate two data centers,
one at our campus and one at a third party co-location facility.
All of our servers are networked and we have redundant data
backup. We manage our technology environment internally. Our
wide area network uses multi-protocol label switching technology
for maximum availability and flexibility. Student access is
provided through redundant data carriers in both data centers
and is load balanced for maximum performance. Real-time
monitoring provides current system status across server,
network, and storage components.
Ground
Campus
Our ground campus is located on approximately 90 acres in
the center of the Phoenix, Arizona metropolitan area, near
downtown Phoenix. Our campus facilities currently consist of 43
buildings with more than 500,000 square feet of space,
which include 63 classrooms, three lecture halls, a 500-seat
theater, three student computer labs with 150 computers that are
available to students 18 hours per day, a 68,000-volume
physical library, and a media arts complex that provides
communications students with audio and video equipment. We house
our ground students in on-campus student apartments and
dormitories that can collectively hold up to 800 students.
We have 18 athletic teams that compete in Division II of
the National Collegiate Athletic Association. Our athletic
facilities include two gymnasiums, which accommodate basketball,
volleyball, and wrestling, as well as facilities for our
baseball, softball, tennis, lacrosse, and swimming programs. Our
baseball program has produced more than ten Major League
Baseball players.
We believe our ground-based programs and traditional campus not
only offers our ground students, faculty, and staff an
opportunity to participate in a traditional college experience,
but also provides our online students, faculty, and staff with a
sense of connection to a traditional university. Additionally,
our full-time ground faculty play an important role in
integrating online faculty into our academic programs and
ensuring the overall consistency and quality of the ground and
online student experience. We believe our mix of a rapidly
growing online program, anchored by a traditional ground-based
program with a nearly
60-year
history and heritage, differentiates us from most other
for-profit postsecondary education providers.
Employees
In addition to our faculty, as of September 30, 2008, we
employed 1,121 staff and administrative personnel in university
services, academic advising and academic support, enrollment
services, university administration, financial aid, information
technology, human resources, corporate accounting, finance, and
other administrative functions. None of our employees is a party
to any collective bargaining or similar agreement with us. We
consider our relationships with our employees to be good.
Competition
There are more than 4,000 U.S. colleges and universities
serving traditional and adult students. Competition is highly
fragmented and varies by geography, program offerings, modality,
ownership, quality level, and selectivity of admissions. No one
institution has a significant share of the total postsecondary
market.
Our ground program competes with Arizona State University,
Northern Arizona University, and the University of Arizona, the
in-state public universities, as well as two-year colleges
within the state community college system. To a limited extent,
our ground program also competes with geographically proximate
universities with similar religious heritages, including Azusa
Pacific University, Baylor University, and Seattle Pacific
University. Our online programs compete with local, traditional
universities geographically located near each of our prospective
students, and with other for-profit postsecondary schools that
offer online degrees, particularly those schools that offer
online graduate programs within our core disciplines, including
Capella
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University, University of Phoenix, and Walden University. In
addition, many public and private schools, colleges, and
universities, including most major colleges and universities,
offer online programs.
Non-profit institutions receive substantial government
subsidies, and have access to government and foundation grants,
tax-deductible contributions and other financial resources
generally not available to
for-profit
schools. Accordingly, non-profit institutions may have
instructional and support resources that are superior to those
in the for-profit sector. In addition, some of our competitors,
including both traditional colleges and universities and other
for-profit schools, have substantially greater name recognition
and financial and other resources than we have, which may enable
them to compete more effectively for potential students. We also
expect to face increased competition as a result of new entrants
to the online education market, including established colleges
and universities that had not previously offered online
education programs.
We believe that the competitive factors in the postsecondary
education market include:
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availability of career-oriented and accredited program offerings;
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the types of degrees offered and marketability of those degrees;
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reputation, regulatory approvals, and compliance history of the
school;
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convenient, flexible and dependable access to programs and
classes;
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qualified and experienced faculty;
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level of student support services;
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cost of the program;
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marketing and selling effectiveness; and
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the time necessary to earn a degree.
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Property
Our ground campus occupies approximately 90 acres in
Phoenix, Arizona. We lease the campus under a lease that expires
in 2024. Renewal terms under this lease allow for us to extend
the current lease for up to four additional five-year terms. We
also lease two additional enrollment facilities, one in Utah and
one in Arizona and have plans to add up to three additional
enrollment facilities during the next six months.
Intellectual
Property
We rely on a combination of copyrights, trademarks, service
marks, trade secrets, domain names and agreements with third
parties to protect our proprietary rights. In many instances,
our course content is produced for us by faculty and other
subject matter experts under work for hire agreements pursuant
to which we own the course content in return for a fixed
development fee. In certain limited cases, we license course
content from a third party on a royalty fee basis.
We are parties to an exclusive license agreement with Blanchard
Education, LLC pursuant to which we license the right to name
our business school The Ken Blanchard College of
Business and to use the name of Ken Blanchard to promote
our business school and business degree programs. In return, we
pay royalties to the licensor equal to a fixed percentage of our
net tuition received in respect of our upper level business
courses. The agreement expires in June 2011, and is
automatically renewable for an additional five years unless
terminated by either party within six months prior to such
expiration date.
We rely on trademark and service mark protections in the United
States for our name and distinctive logos, along with various
other trademarks and service marks related to our specific
offerings. We also own domain name rights to
www.gcu.edu, as well as other words and
phrases important to our business.
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Legal
Proceedings
On February 28, 2007, we filed a complaint against SunGard
Higher Education Managed Services, Inc. in the Maricopa County
Superior Court, Case
No. CV2007-003492,
for breach of contract, breach of implied covenant of good faith
and fair dealing, breach of warranty, breach of fiduciary duty,
tortious interference with business expectancy, unjust
enrichment, and consumer fraud related to a technology services
agreement between the parties. In response, SunGard moved to
stay the litigation and compel arbitration. The court granted
the motion to stay, and compelled the parties to arbitrate.
SunGard has also counterclaimed alleging breach of contract
relating to the parties technology services agreement.
Following discovery, the arbitration occurred in late May 2008
and final arguments were heard in July 2008. We sought
approximately $1.4 million from SunGard, and SunGard
counterclaimed for approximately $2.5 million. On
October 22, 2008, the arbitration panel awarded SunGard net
damages in the amount of approximately $250,000 plus interest.
We will also be responsible for paying a share of the related
arbitration expenses.
On August 14, 2008, the Office of Inspector General of the
Department of Education served an administrative subpoena on
Grand Canyon University requiring us to provide certain records
and information related to performance reviews and salary
adjustments for all of our enrollment counselors and managers
from January 1, 2004 to the present. See
Regulation Regulation of Federal Student
Financial Aid Programs Incentive compensation
rule. We are cooperating with the Office of Inspector
General to facilitate its investigation, but cannot presently
predict the ultimate outcome of the investigation or any
liability or other sanctions that may result.
On September 11, 2008, we were served with a qui tam
lawsuit that had been filed against us in August 2007, in
the United States District Court for the District of Arizona by
a then-current employee on behalf of the federal government. All
proceedings in the lawsuit had been under seal until
September 5, 2008, when the court unsealed the first
amended complaint, which had been filed on August 11, 2008.
The qui tam lawsuit alleges, among other things, that we
violated the False Claims Act by knowingly making false
statements, and submitting false records or statements, from at
least 2001 to the present, to get false or fraudulent claims
paid or approved, and asserts that we have improperly
compensated certain of our enrollment counselors in violation of
the Title IV law governing compensation of such employees,
and as a result, improperly received Title IV program
funds. The complaint specifically alleges that some of our
compensation practices with respect to our enrollment personnel,
including providing non-cash awards, have violated the
Title IV law governing compensation. While we believe that
the compensation policies and practices at issue in the
complaint have not been based on success in enrolling students
in violation of applicable law, the Department of
Educations regulations and interpretations of the
incentive compensation law do not establish clear criteria for
compliance in all circumstances, and some of these practices,
including in respect of non-cash awards, are not within the
scope of any specific safe harbor provided in the
compensation regulations. The complaint seeks treble the amount
of unspecified damages sustained by the federal government in
connection with our receipt of Title IV funding, a civil
penalty for each violation of the False Claims Act,
attorneys fees, costs, and interest. A number of similar
lawsuits have been filed in recent years against educational
institutions that receive Title IV funds. We have filed a
motion to dismiss the qui tam lawsuit and plan to contest
it vigorously.
If it were determined that any of our compensation practices
violated the incentive compensation law, we could experience an
adverse outcome in the qui tam litigation and be subject
to substantial monetary liabilities, fines, and other sanctions,
any of which could have a material adverse effect on our
business, prospects, financial condition and results of
operations and could adversely affect our stock price. We cannot
presently predict the ultimate outcome of this case or any
liability or other sanctions that may result. It is possible
that, during the course of the litigation, other information may
be discovered that would adversely affect the outcome of the
litigation.
From time to time, we are a party to various other lawsuits,
claims, and other legal proceedings that arise in the ordinary
course of our business. We are not at this time a party, as
plaintiff or defendant, to any legal proceedings which,
individually or in the aggregate, would be expected to have a
material adverse effect on our business, financial condition, or
results of operation.
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REGULATION
We are subject to extensive regulation by state education
agencies, accrediting commissions, and the federal government
through the Department of Education under the Higher Education
Act. The regulations, standards, and policies of these agencies
cover the vast majority of our operations, including our
educational programs, facilities, instructional and
administrative staff, administrative procedures, marketing,
recruiting, financial operations, and financial condition.
As an institution of higher education that grants degrees and
certificates, we are required to be authorized by appropriate
state education authorities. In addition, in order to
participate in the federal programs of student financial
assistance for our students, we must be accredited by an
accrediting commission recognized by the Department of
Education. Accreditation is a non-governmental process through
which an institution submits to qualitative review by an
organization of peer institutions, based on the standards of the
accrediting commission and the stated aims and purposes of the
institution. The Higher Education Act requires accrediting
commissions recognized by the Department of Education to review
and monitor many aspects of an institutions operations and
to take appropriate action if the institution fails to meet the
accrediting commissions standards.
Our operations are also subject to regulation by the Department
of Education due to our participation in federal student
financial aid programs under Title IV of the Higher
Education Act, which we refer to in this prospectus as the
Title IV programs. The Title IV programs include
educational loans with below-market interest rates that are
guaranteed by the federal government in the event of a
students default on repaying the loan, and also grant
programs for students with demonstrated financial need. To
participate in the Title IV programs, a school must receive
and maintain authorization by the appropriate state education
agency or agencies, be accredited by an accrediting commission
recognized by the Department of Education, and be certified as
an eligible institution by the Department of Education.
Our business activities are planned and implemented to comply
with the standards of these regulatory agencies. We employ a
full-time director of compliance who is knowledgeable about
regulatory matters relevant to student financial aid programs
and our Chief Financial Officer, Chief Administrative Officer,
and General Counsel also provide oversight designed to ensure
that we meet the requirements of our regulated operating
environment.
State
Education Licensure and Regulation
We are authorized to offer our programs by the Arizona State
Board for Private Postsecondary Education, the regulatory agency
governing private postsecondary educational institutions in the
state of Arizona, where we are located. We do not presently have
campuses in any states other than Arizona. We are required by
the Higher Education Act to maintain authorization from the
Arizona State Board for Private Postsecondary Education in order
to participate in the Title IV programs. This authorization
is very important to us and our business. To maintain our state
authorization, we must continuously meet standards relating to,
among other things, educational programs, facilities,
instructional and administrative staff, marketing and
recruitment, financial operations, addition of new locations and
educational programs, and various operational and administrative
procedures. Failure to comply with the requirements of the
Arizona State Board for Private Postsecondary Education could
result in us losing our authorization to offer our educational
programs, which would cause us to lose our eligibility to
participate in the Title IV programs and which, in turn,
could force us to cease operations. Alternatively, the Arizona
State Board for Private Postsecondary Education could restrict
our ability to offer certain degree programs.
Most other states impose regulatory requirements on out-of-state
educational institutions operating within their boundaries, such
as those having a physical facility or recruiting students
within the state. State laws establish standards in areas such
as instruction, qualifications of faculty, administrative
procedures, marketing, recruiting, financial operations, and
other operational matters, some of which are different than the
standards prescribed by the Department of Education or the
Arizona State Board for Private Postsecondary Education. Laws in
some states limit schools ability to offer educational
programs and award degrees to residents of those states. Some
states also prescribe financial regulations that are different
from those of the Department of Education, and many require the
posting of surety bonds.
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In addition, several states have sought to assert jurisdiction
over educational institutions offering online degree programs
that have no physical location or other presence in the state
but that have some activity in the state, such as enrolling or
offering educational services to students who reside in the
state, employing faculty who reside in the state, or advertising
to or recruiting prospective students in the state. State
regulatory requirements for online education vary among the
states, are not well developed in many states, are imprecise or
unclear in some states, and can change frequently. New laws,
regulations, or interpretations related to doing business over
the Internet could increase our cost of doing business and
affect our ability to recruit students in particular states,
which could, in turn, negatively affect enrollments and revenues
and have a material adverse effect on our business.
We have determined that our activities in certain states
constitute a presence requiring licensure or authorization under
the requirements of the state education agency in those states.
In other states, we have obtained approvals as we have
determined necessary in connection with our marketing and
recruiting activities or where we have determined that our
licensure or authorization can facilitate the teaching
certification process in a particular state for graduates of our
College of Education. We review the licensure requirements of
other states when appropriate to determine whether our
activities in those states constitute a presence or otherwise
require licensure or authorization by the respective state
education agencies. We believe we are licensed or authorized in
those jurisdictions where a license or authorization is
currently required, and we do not believe that any of the states
in which we are currently licensed or authorized, other than
Arizona, are individually material to our operations.
Nevertheless, because we enroll students in all 50 states and
the District of Columbia, we expect that other state regulatory
authorities will request that we seek licensure or authorization
in their states in the future. Although we believe that we will
be able to comply with additional state licensing or
authorization requirements that may arise or be asserted in the
future, if we fail to comply with state licensing or
authorization requirements for a state, or fail to obtain
licenses or authorizations when required, we could lose our
state licensure or authorization by that state or be subject to
other sanctions, including restrictions on our activities in
that state, fines, and penalties. The loss of licensure or
authorization in a state other than Arizona could prohibit us
from recruiting prospective students or offering services to
current students in that state, which could significantly reduce
our enrollments.
State
Professional Licensure
Many states have specific requirements that an individual must
satisfy in order to be licensed as a professional in specified
fields, including fields such as education and healthcare. These
requirements vary by state and by field. A students
success in obtaining licensure following graduation typically
depends on several factors, including the background and
qualifications of the individual graduate, as well as the
following factors, among others:
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whether the institution and the program were approved by the
state in which the graduate seeks licensure, or by a
professional association;
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whether the program from which the student graduated meets all
requirements for professional licensure in that state;
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whether the institution and the program are accredited and, if
so, by what accrediting commissions; and
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whether the institutions degrees are recognized by other
states in which a student may seek to work.
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Many states also require that graduates pass a state test or
examination as a prerequisite to becoming certified in certain
fields, such as teaching and nursing. Many states will certify
individuals if they have already been certified in another state.
Our College of Education is approved by the Arizona State Board
of Education to offer Institutional Recommendations
(credentials) for the certification of elementary, secondary,
and special education teachers and school administrators. Our
College of Nursing and Health Services is approved by the
Arizona State Board of Nursing for the Bachelor of Science in
Nursing and Master of Science Nursing degrees. Due
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varying requirements for professional licensure in each state,
we inform students of the risks associated with obtaining
professional licensure and that it is each students
responsibility to determine what state, local, or professional
licensure and certification requirements are necessary in his or
her individual state.
Accreditation
We have been institutionally accredited since 1968 by the Higher
Learning Commission and its predecessor, each a regional
accrediting commission recognized by the Department of
Education. Our accreditation was reaffirmed in 2007 for the
maximum term of 10 years as part of a regularly scheduled
reaffirmation process. Accreditation is a private,
non-governmental process for evaluating the quality of
educational institutions and their programs in areas including
student performance, governance, integrity, educational quality,
faculty, physical resources, administrative capability and
resources, and financial stability. To be recognized by the
Department of Education, accrediting commissions must adopt
specific standards for their review of e